129% Annual Returns With This ‘Win-Win’ Income Strategy
It was another perfect month for Income Trader’s Amber Hestla…
A few weeks ago, three more “put” options Amber sold for her Income Trader portfolio expired worthless (when a put expires worthless, the seller keeps the premium they collected from selling the option as a 100% profit). The most recent victories mark Amber’s 26th, 27th and 28th (out of 28) profitable closed trades.
If you’re a regular StreetAuthority reader, you’re likely familiar with Amber’s put-selling strategy. If not, you can read our previous issues explaining it in detail here and here.
In short, Amber collects extra investment income by selling put options on stocks she thinks are undervalued. These “Instant Income” checks, as she calls them, usually range anywhere from $100… to $150 … to even $200. (And this is just for one put option. Many of her readers scale up to collect even more income.)
#-ad_banner-#Most of the time — 93% in Amber’s experience — the option expires worthless and the money she collects is hers to keep as pure profit.
But if you read the above paragraphs closely, you’ll notice I said Amber’s current track record implies she’s yet to close an unprofitable trade… So if 93% of the puts she’s recommended have expired worthless, what happened to other 7%?
To answer the question, we first need to recap how options work…
A put option gives investors the right, but not the obligation, to sell a stock at a specified price before a specified date. So when you sell a put option, you have the obligation to purchase a stock from the put buyer if it falls below a specified price (the option’s strike price).
For example, on top of the three contracts that expired worthless in Amber’s portfolio this month, she also had a fourth that didn’t. Specifically, the puts she sold in August on Green Mountain Coffee Roasters (Nasdaq: GMCR) expired “in the money” (the price of GMCR was trading below the option’s strike price of $67.50 the day it expired). As a result, Amber was assigned 100 shares of GMCR on October 19 for $67.50 a piece.
At this point, you’re probably thinking Amber only has two options: She can sell the shares immediately, or she can wait for the stock to rebound and sell them at a later date (remember, she already likes the company to begin with).
But unbeknownst to most, there’s actually a third, potentially more lucrative strategy that Amber can employ in order to leverage her newly purchased shares of GMCR, and it’s one that can reap big instant “dividends.”
I’m talking about selling covered call options.
A call option is exactly the opposite of a put option. It gives the buyer the right — but not the obligation — to buy a stock from the call seller if it rises above a specified price before a specified date. When the seller actually owns the shares of the stock they’re selling the call on, the option is considered a “covered” call.
By selling covered calls on GMCR, Amber was able to collect $129 in “Instant Income.”
Of course, only time will tell if this trade will work in Amber’s favor… but if history is any indicator, there’s reason to believe it should.
The only other time Amber has been assigned shares of a stock was back in April of this year, when the puts she sold on mining equipment maker Joy Global (NYSE: JOY) in February expired “in the money.” As a result of the trade, Amber received 100 shares of Joy for $55 (the option’s strike price) a piece the day the option expired.
In order to take advantage of this opportunity, Amber recommended selling May covered calls on Joy with a $55 strike. As she told her Income Trader subscribers at the time:
To generate immediate income, I recommend selling the JOY May 55 Calls for $1.90 – $2.10. Selling this call will generate $200 in immediate income.
If JOY is trading above the $55 strike price when the call expires at the close on May 17, we’ll be obligated to sell 100 shares of JOY at $55 per for each contract sold.
She went on to say…
There are two possible outcomes to this trade.
[Either] JOY is trading above $55 at expiration, and the call gets exercised and the shares sold [or] Joy is trading below $55 at expiration and we continue to own the stock and have an opportunity to sell another call at that time.
As it turns out, Amber’s assessment was spot on. On May 17 — the day the option expired — shares of Joy were trading near $57 a piece… slightly above the call’s $55 strike price.
As a result, Amber immediately sold the shares from her portfolio and closed the trade. The position was only open for about 26 days, but it gave Amber (and her subscribers) a 5.6% return on investment — or an annualized gain of 129%.
That’s one reason being assigned shares from a put option is not necessarily a bad thing. Every time you get put shares of a stock, you have the potential to earn even more income by selling a call option.
But selling covered calls isn’t limited to options traders like Amber either…
One of the best parts about this strategy is that it requires little work on the seller’s part. All you need is a brokerage account and at least 100 shares of the underlying stock to get started. As a result, anyone can sell covered calls to boost their investment returns…
What’s more, since you actually own the stock until the option is “in the money,” you’ll get to benefit from dividends and other payments that your holdings pay out over time, too.
If today’s market environment has you starved for more income, consider employing a covered call strategy like the one Amber uses in her premium newsletter, Income Trader… From our experience, it’s one of the best ways to leverage the high-quality stocks in your portfolio and earn extra income.
Note: As we said earlier, October marks another perfect month for Amber’s Income Trader portfolio. Not only did she close her 28th (out of 28) profitable closed trade, but she was able to generate an additional $129 in income per contract by selling covered calls on GMCR. Right now, Amber (and her subscribers) are earning an average return of 8.6% every 48 days. To learn more about Amber’s options selling strategy and to see her track record — follow this link.