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Twitter After a recent survey, it has come to my attention that many, if not most, of you are seeking a reliable income strategy . . . a reliable strategy that can provide you with consistent income without an overwhelming amount of risk.
If you fall into category above, here is the income strategy you must start using now.
This is a strategy that has allowed us to reap returns of 130.1% in SPDR Gold Shares ETF (GLD), 99.1% in iShares 20+ Year Treasury Bond ETF, 36% in Verizon (VZ), 36.1% in Pfizer (PFE), 73% in United Rentals (URI), 98.9% in D.R. Horton (DHI), 46.5% in KB Homes (KBH) and even 24.7% in HP Inc. (HP) while the stock is down 10.6%.
Overall, by using this strategy we are not only able to exceed the stock’s performance by three to six times, but we are also able to minimize losses. For instance, like HP, Sketcher’s stock is down, roughly 17.3%, but we have minimized all of those losses by actually creating a net gain of 2.3%. Again, it proves the power of our income strategy.
My income strategy is similar to a traditional covered call strategy, with one exception in the mechanics. Rather than buying 100 or more shares of stock, an investor simply buys an in-the-money LEAPS call and sells a near-term out-of-the-money call against it.
LEAPS, or long-term equity anticipation securities, are basically options contracts with an expiration date longer than one year, at the time of the trade. Mechanically, LEAPS are no different than short-term options, but the longer duration offered through a LEAPS contract gives an investor the opportunity for long-term exposure.
Other than reducing the capital required, the reason we purchase LEAPS is to minimize the extrinsic value and theta decay. Basically, a poor man’s covered call is viewed as a diagonal trade with a significantly longer duration.
How I Approach Our Income Strategy
Let’s take a look at Gold.
So far in 2020, the gold ETF, GLD, is up 19.5%. Our position using our income strategy is up 130.1% . . . .and we’ve managed to “pay ourselves” 16 times over the course of the year for a total of $2,738. That’s with the bare minimum investment of just $2,145.
The first step is to choose an appropriate LEAPS contract to replace buying 100 shares of GLD.
If we were to buy 100 shares of GLD at $175.64 per share, our capital requirement would be a minimum of $17,564 plus commissions ($175.64 times 100 shares).
For some investors, this just isn’t affordable. For others, due to the capital outlay it’s hard to take on that large of a capital position while remaining properly diversified. I get it, and so does the options market. That is why there an alternative, an alternative that many hedge funds have decided to employ due to the overall capital savings and reliable, consistent income payouts that this strategy provides.
If we look at GLD’s option chain, we will quickly notice that the expiration cycle with the longest duration is the Jan. 20, 2023 cycle, which has roughly 791 days left until expiration.
We can buy one options contract, which is equivalent to 100 shares of GLD, for roughly $43, if not cheaper. Remember, always use a limit order – never buy at the ask price, which in this case is $44.35.
If we buy the $140 strike for $43 we are out $4,300, rather than the $17,564 we would spend for 100 shares of GLD. That’s a savings on capital required of 75.5%. Now we have the ability to use the capital saved ($13,264) to work in other ways.
What About Income?
The next step is to sell an out-of-the-money call against our LEAPS contract. This is how we create our steady stream of consistent, reliable income going. I look at it like creating my own dividend 10-15 times year.
We can sell the December $180.5 strike with 34 days left until expiration. Of course, we have lots of choices, but this is something I discuss, in great detail, in my live webinars.
So again, let’s say we decide to sell the $180.5 strike for $1.57, or $157, against our $140 LEAPS contract. By doing so, we are bringing in 3.7% roughly every 30 days. That’s right, 3.7% every 30 days. It might sound like much at the start, but over the course of the year we are selling 44.4% worth of income.
And the best part, we can continue to sell calls against our LEAPS contract every month or so to lower the total capital outlay . . . in perpetuity. But remember, options have a limited life, so when we get closer to the LEAPS contract’s expiration, we will simply sell the contract and use the proceeds to continue our income strategy.
I will be going over all the facets of my income strategy next Tuesday. The strategy has led to out-sized gains in good and bad markets. One thing is for certain, if you are an income investor…you will not want to miss out on learning how to use this powerful income strategy. To learn more about poor man’s covered calls – and other income-producing options strategies – I invite you to attend my upcoming webinar. Just click here for more details and I’ll see you on Tuesday.