Banking Free Money from Covered Calls
While at the World MoneyShow in Orlando, Florida, the workshop sessions that I conducted with the highest attendance were those that dealt with the business of selling covered call options.
One standing-room only session was centered around my latest advisory service, Quick Income Trader, which focuses on selling calls on high-powered growth stocks like NVIDIA Corp. (NVDDA), Take-Two Interactive (TTWO), Starbucks (SBUX) and Smith & Wesson (SWHC). These companies have in common the profile of strong top- and bottom-line growth and bullish forward guidance.
That’s a tall order in this market, where revenue growth for the S&P 500 will decline for the fifth straight quarter. That’s not a typo. Index investing is in for another ho-hum year at best and the major averages are very likely to be volatile and range-bound. Against this backdrop, owning a select set of stocks that are in their own stealth bull markets where attractive call option premium can be banked is the winning formula for 2016.
When investing like a pro, managing a basket of five to seven hot names where calls are sold with expirations of no more than two months out, income investors can generate 10%, 20% or even 30% streams of income against hot and widely held growth stocks for growth fund managers. These stocks are demonstrating two forms of bullish activity, earnings momentum and technical relative strength, both of which are the benchmarks to the Investor’s Business Daily model by which the biggest market winners are identified.
The idea of turning market volatility into a friendly force goes against conventional wisdom, but it’s just the kind of strategy that makes for a successful covered call program. Volatility causes option premiums to expand and thus pay out more for short-term holding periods. In Quick Income Trader, I recommend selling calls on stocks that have no more than a two-month time frame to each trade. Rotation of five to seven call option strategies allows an investor to bank income on a monthly basis and is why this strategy is so popular with income investors looking for creative ways to produce a generous stream of income.
What’s hugely appealing to a monthly covered call strategy is that it takes only 10 minutes a week to manage. Executed properly, this strategy will easily outperform almost all other forms of income without having to delve into the junk bond market or high-risk commodity sector. I don’t know anyone who wouldn’t want to own Starbucks (SBUX) if it had an annual yield of 20%. That may sound too good to be true, but is, in fact, an ideal working model of just how the program is built, selling fat premium a half a dozen times per year on institutional darling stocks.
Think about it. The major averages endured a trap door sell-off back in August and again in January and stocks like Starbucks and Microsoft are trading within a point or two of their all-time highs. Staying on point with a concentrated portfolio of five to seven stallion stocks that are “game over” dominators in their respective sectors where highly liquid options can be sold against is, in my view, one of the attractive methods for producing fantastic returns and keeping it simple. Quick Income Trader: All it takes is a cup of coffee and 10 minutes a week. That’s it!
In case you missed it, I encourage you to read my e-letter column from last week about the positive impact of recent economic data. I also invite you to comment in the space provided below my Eagle Daily Investor commentary.
