Today, I'm going to let you in on one of the market's best-kept secrets...
It turns out investors are willing to pay you to sell stocks you already own at a profit.
You read that right.
And you want to know the funny thing? Oftentimes, you don't even have to end up selling. You simply take their money. And rest assured, it's all perfectly legal. I can't believe investors are missing out on these payments...
It's one of the easiest and safest ways to generate 20%-plus returns on a regular basis.
Once you've mastered the technique, I wouldn't be surprised if you stopped trading stocks or buying and holding investments.
That's how powerful this strategy is: it can drastically improve the way you make money in the markets. That goes for conservative income investors and aggressive traders alike.
The technique involves selling options -- specifically covered calls.
A call option gives the buyer the right -- but not the obligation -- to buy a stock from the call seller if it's trading above a specified price before a specified date.
When you sell a call option, you have the obligation to sell a particular stock at a specified price at a set time in the future. A covered call strategy requires you to sell call options on a stock you just bought or already own.
When you sell a call, you generate a premium, or what we call "instant yields," upfront as pure profit.
Let's take a quick look at an example of a covered call trade for Ctrip.com (Nasdaq: CTRP) that I shared with readers recently to understand how it works.
Ctrip.com (Nasdaq: CTRP) isn't a household name in the United States. But in China, it is one of the country's largest travel sites. You can think of it as the equivalent to Priceline.com (Nasdaq: PCLN) in the United States.
Travelers use Ctrip.com to book air, hotel, and train accommodations. The stock -- which trades right here on the Nasdaq -- has doubled in the past year alone.
But what most investors don't realize is that the stock is a great candidate for writing covered calls... and right now you could earn thousands of dollars doing so.
Say you bought 500 shares of CTRP. At a recent price of $38.95, that 500-share stake would cost $19,475.
By owning these shares, you are now eligible to write a covered call on them.
When I recommended this trade, CTRP June 2014 $45 calls were priced at $3.55.
That means the call option expires in June, and has a "strike" price of $45. Meanwhile, each contract you sell brings in $355 ($3.55 x 100), since each contract controls 100 shares, the instant you create and sell the option.
If you owned 500 shares, that means you could write five covered call contracts. That would rake in $1,775 in income instantly. This money is yours to keep, no matter what.
If the shares stay below the $45 "strike" price, then the options you wrote expire worthless. (Remember, if you're selling calls, you want them to expire worthless. It means you keep the shares and can write more calls in the future.)
That means you get the $1,775 in income, plus you keep your 500 shares, allowing you to repeat the process all over again.
If you repeated this process twice a year (giving time for the June options to expire), you'd earn about $3,550 in annual option income while still owning 500 shares of the stock.
Earning $3,550 on your $19,475 investment is the equivalent of earning an 18% "yield."
Now, if the shares rise above $45 before the option expires in June, then you would sell your shares to the option owner for that price.
That might seem like a bad thing. But remember, if you bought the 500 shares at the recent price of $38.95 and sold them at $45, you've earned about $3,000 in capital gains. On top of that, you also have your $1,775 in option income. That's a total gain of $4,775 on a $19,500 investment, or 24.5% in less than six months.
But what if you don't want to invest $19,500 in CTRP to unlock this income? That's the good thing about covered calls...
First, options are fully scalable. That means if you want to invest less you can do so, but you will receive a smaller payment. Likewise, investing more increases your payment. Here are the payments you can earn on various investment sizes, given the prices mentioned above...
Second, options are available on almost any stock. All major companies -- and hundreds of smaller ones -- have options that trade on the open market. Whether you want to use options with a big name like General Electric or Google or a smaller company like Green Mountain Coffee Roasters, you can do so. And yes, that means you can write covered calls with the stocks you already hold in your personal portfolio.
Selling options is the closest thing to a no-lose situation in the financial markets. The secret is only selling options on stocks you want to own. If you follow this one rule, you're ahead of 90% of options traders.
Selling covered calls can be part of a conservative or aggressive portfolio. It can also be used as a stock selling strategy to ensure that you sell when stocks hit their target price. Best of all, it puts you in command of how much income you receive from your holdings, even if the stocks don't pay a regular dividend.