There are a number of strategies available to investors that use option contracts to generate attractive levels of income. Two strategies in particular that have become popular with individual investors are selling covered calls and selling puts. These strategies can be implemented through traditional brokerage accounts, as well as through qualified accounts such as IRAs. #-ad_banner-#Covered Calls: Investors purchase shares of stock and then sell call options against these shares. Selling the call options leaves the investor with an obligation to sell the shares of stock if the… Read More

There are a number of strategies available to investors that use option contracts to generate attractive levels of income. Two strategies in particular that have become popular with individual investors are selling covered calls and selling puts. These strategies can be implemented through traditional brokerage accounts, as well as through qualified accounts such as IRAs. #-ad_banner-#Covered Calls: Investors purchase shares of stock and then sell call options against these shares. Selling the call options leaves the investor with an obligation to sell the shares of stock if the price of the stock is above the strike price of the option when the option expires. Income is generated through the proceeds received from selling the call option contracts. Selling Puts: Investors sell unhedged or “naked” put option contracts on stocks that they expect to trade higher (or at least remain stable). Selling puts obligates the investor to buy shares of stock if the market price falls below the strike price when the option expires. Income is generated through the proceeds received from selling the put option contracts. One thing many investors… Read More

The covered call strategy can be a very effective approach to boosting the amount of income you generate from your investment portfolio. In fact, when things are going well and the stocks that you use remain stable or increase in price, it is not unreasonable to target returns between 25% and 35% per year.#-ad_banner-# The approach takes a certain amount of maintenance, as we typically set up trades that expire over a four- to eight-week timeframe. But the time investment usually turns out to be worthwhile considering the reliable income stream that is available. Although the… Read More

The covered call strategy can be a very effective approach to boosting the amount of income you generate from your investment portfolio. In fact, when things are going well and the stocks that you use remain stable or increase in price, it is not unreasonable to target returns between 25% and 35% per year.#-ad_banner-# The approach takes a certain amount of maintenance, as we typically set up trades that expire over a four- to eight-week timeframe. But the time investment usually turns out to be worthwhile considering the reliable income stream that is available. Although the covered call strategy is fairly easy to implement, the true key to long-term success is being able to manage risk when trades do not go as planned. Proper risk management will allow you to keep your capital base intact, which in turn allows you to make up any losses quickly and continue your process of generating investment income. Before I explain how to manage risk when stocks decline, let’s first take a quick look at how the covered call strategy works. To begin with, we purchase shares of a stock that we believe will be stable or move higher. We… Read More

Activist investors have the ability to influence significant changes in companies that they take an interest in, often leading to greater profits and investor confidence and ultimately driving stock prices higher. #-ad_banner-#In practice, an activist typically buys a large block of shares and then uses this ownership as leverage to influence the company’s direction. Many times, an activist investor will require a seat (or several) on the board and may push for replacing executives if it appears the current leaders are not adequately managing the company. Activists may take the form of institutional investors (such as mutual funds,… Read More

Activist investors have the ability to influence significant changes in companies that they take an interest in, often leading to greater profits and investor confidence and ultimately driving stock prices higher. #-ad_banner-#In practice, an activist typically buys a large block of shares and then uses this ownership as leverage to influence the company’s direction. Many times, an activist investor will require a seat (or several) on the board and may push for replacing executives if it appears the current leaders are not adequately managing the company. Activists may take the form of institutional investors (such as mutual funds, hedge funds or endowments), or they may simply be one or more wealthy individuals. Whatever form they take, activist investors can be very motivated toward driving change in a company and unlocking shareholder value. For this reason, it makes sense to keep track of the actions of successful activist investors, and to trade alongside these opportunists when possible. Today, I want to take a look at an income trade that does just that. Darden Restaurants Pressured To Break Up Our target today is Darden Restaurants (NYSE: DRI), owns and operates full-service restaurants chains such as the well-known Olive Garden… Read More

For as good as 2013 was for stocks, it was equally bad for bonds. #-ad_banner-#Bonds posted their lowest return since 1994. Investment-grade bonds posted their lowest return since 1980 and first loss since 1999. Last year was the only third year in the past 34 that bonds closed the year with a loss. This bout of weakness was driven by the Federal Reserve, which in May announced its intention to taper its quantitative easing stimulus program. That sent many investors fleeing bonds trying to avoid rising rates.  But that would be a mistake. One group of bonds is… Read More

For as good as 2013 was for stocks, it was equally bad for bonds. #-ad_banner-#Bonds posted their lowest return since 1994. Investment-grade bonds posted their lowest return since 1980 and first loss since 1999. Last year was the only third year in the past 34 that bonds closed the year with a loss. This bout of weakness was driven by the Federal Reserve, which in May announced its intention to taper its quantitative easing stimulus program. That sent many investors fleeing bonds trying to avoid rising rates.  But that would be a mistake. One group of bonds is in position to continue bucking that bearish trend — and deliver more than double the yield of the 10-year Treasury. While most classes of bonds were suffering sharp losses last year, there was one group that was virtually immune from that weakness. In fact, these bonds actually finished the year in the green, making them the top-performing class of bonds in 2013.  While the iShares 20+ Year Treasury Bond (NYSE: TLT) has fallen nearly 10% in the past 12 months and iShares iBoxx Investment Grade Corp Bond (NYSE: LQD) is down almost 1%, the iShares iBoxx High-Yield Corporate Bond (NYSE:… Read More

Real estate prices are rising, and in many cities, are back to where they were before the 2007-2008 housing market crash. And mortgage rates are still quite low on a historical basis. American Capital Agency Corp. (Nasdaq: AGNC) invests in residential mortgage pass-through securities and collateralized mortgage obligations for which the principal and interest payments are guaranteed by the U.S. government or a government-sponsored agency. Structured as a real estate investment trust (REIT), it distributes at least 90% of its taxable income to its shareholders. Here is what AGNC looks like over the past year: The… Read More

Real estate prices are rising, and in many cities, are back to where they were before the 2007-2008 housing market crash. And mortgage rates are still quite low on a historical basis. American Capital Agency Corp. (Nasdaq: AGNC) invests in residential mortgage pass-through securities and collateralized mortgage obligations for which the principal and interest payments are guaranteed by the U.S. government or a government-sponsored agency. Structured as a real estate investment trust (REIT), it distributes at least 90% of its taxable income to its shareholders. Here is what AGNC looks like over the past year: The stock is now above its 20-day (red line) and 50-day moving averages (blue line). Also notice that the red line has started to penetrate the blue line, which tells us momentum is currently on the upswing. Next is a chart comparing AGNC (green line) with the Dow Jones Equity REIT Index: #-ad_banner-#As you can see, the sector exchange-traded fund (ETF) is also on the upswing, but at a faster rate than AGNC. Therefore, AGNC has the potential to catch the index’s momentum. On the fundamental side, the consensus earnings per share (EPS) estimate for next year is $2.58,… Read More

It costs about five times as much to insure a Ferrari than a regular car. That’s partly because with top speeds above 200 mph, the probability of an accident is much higher in a Ferrari.#-ad_banner-#​ The options market is built on that same principle of risk versus reward — except instead of fast cars, it’s all about the VIX. Also known as the “fear index,” the VIX measures investors’ expectations for volatility in the S&P 500 Index in the next 30 days. When the VIX is high, the market is expecting lots of volatility — and for options… Read More

It costs about five times as much to insure a Ferrari than a regular car. That’s partly because with top speeds above 200 mph, the probability of an accident is much higher in a Ferrari.#-ad_banner-#​ The options market is built on that same principle of risk versus reward — except instead of fast cars, it’s all about the VIX. Also known as the “fear index,” the VIX measures investors’ expectations for volatility in the S&P 500 Index in the next 30 days. When the VIX is high, the market is expecting lots of volatility — and for options traders, there is nothing more important than the VIX. It is the single most important factor affecting options pricing.  With the Federal Reserve crushing expectations of weakness in the S&P 500, the VIX has been near record lows: That low reading on the VIX is both good and bad for put sellers. It’s good because it lowers the probability of being put shares. But it’s bad because it reduces the value of the premium I collect when selling a put. And with the VIX falling for the past few years, it has become less profitable to sell puts. … Read More

One of the benefits of the covered call strategy is that it is usually a “set and forget” type of approach. By that, I mean that we can set up our positions (buying stocks and selling call options), and then wait until the option contracts expire to make any adjustments. #-ad_banner-#While the majority of covered call positions are held until maturity, there are certain times when it makes sense to adjust a position before the options expire in order to reduce risk or to capture an even bigger profit. We’ve previously covered adjustments to covered call positions for the… Read More

One of the benefits of the covered call strategy is that it is usually a “set and forget” type of approach. By that, I mean that we can set up our positions (buying stocks and selling call options), and then wait until the option contracts expire to make any adjustments. #-ad_banner-#While the majority of covered call positions are held until maturity, there are certain times when it makes sense to adjust a position before the options expire in order to reduce risk or to capture an even bigger profit. We’ve previously covered adjustments to covered call positions for the purpose of risk management. Today, I want to focus on adjustments to covered call positions that move dramatically in our favor. In these situations, the objective is to maximize our profit and make the most efficient use of our capital. Anatomy Of An Accelerated Covered Call Position To understand both why and how to take advantage of a covered call position that moves sharply in our favor, let’s set up a hypothetical trade to see exactly how the different components of the trade work together. For our example, let’s assume we are buying the iShares Silver Trust (NYSE: SLV)… Read More

In most places, swallowing microchips and wearing sensors to monitor back posture wouldn’t be cool. But the annual International Consumer Electronics Show isn’t most places. #-ad_banner-#It’s more like an episode of “Star Trek” — fueled by a couple trillion dollars and 100,000 mad scientists. The annual Consumer Electronics Show in Las Vegas is the Super Bowl for the technology industry. As the hottest industry event of the year, CES is the place where tech’s biggest brands and boldest startups come to show off. That makes the event a window into the mind of the technology industry. And with… Read More

In most places, swallowing microchips and wearing sensors to monitor back posture wouldn’t be cool. But the annual International Consumer Electronics Show isn’t most places. #-ad_banner-#It’s more like an episode of “Star Trek” — fueled by a couple trillion dollars and 100,000 mad scientists. The annual Consumer Electronics Show in Las Vegas is the Super Bowl for the technology industry. As the hottest industry event of the year, CES is the place where tech’s biggest brands and boldest startups come to show off. That makes the event a window into the mind of the technology industry. And with all the hottest products and ideas on display, it’s also a great way to see where the tech industry is making its biggest investments. Some of the products at this year’s CES will be rock stars, and others will fail — but across the board, the biggest and best ideas coming out of tech all have one thing in common: the ability to send and receive data. Consumer and commercial devices are getting smarter. They are also becoming more connected to the Internet and increasingly networked with other devices.  That has led to huge increases in data consumption, particularly mobile. Read More

The covered call strategy can be a very lucrative approach to investing, especially during periods of uncertainty, when most traders are lucky to simply maintain their capital base.#-ad_banner-# As a brief overview, this strategy includes buying a stock and then selling call options against the position. For selling the call option contract, we collect a premium, and in return, become obligated to sell our stock at the option’s strike price, assuming the market price is above that level before… Read More

The covered call strategy can be a very lucrative approach to investing, especially during periods of uncertainty, when most traders are lucky to simply maintain their capital base.#-ad_banner-# As a brief overview, this strategy includes buying a stock and then selling call options against the position. For selling the call option contract, we collect a premium, and in return, become obligated to sell our stock at the option’s strike price, assuming the market price is above that level before the option expires. As a general rule, I prefer to set up covered call trades that will expire in four to eight weeks. This allows us to sell calls at an attractive price and still close out our trades for profits relatively quickly. Typically, we can expect to book a profit of 3% to 5% over the time period, which means that our per-year returns are in the neighborhood of 25% to 35%. Dividends Add Firepower To A Covered Call Strategy Covered call trades are powerful enough on their own. But when you add in the extra income from… Read More

Risk is a fundamental part of investing. It might be easiest to understand by using bonds as an example.#-ad_banner-#​ With bonds, the only investment that is considered to be risk free is short-term Treasury bills. For now, risk-free investing offers a return of 0.04%. At that rate, $1 million in retirement savings will provide $400 in income. Most investors don’t have $1 million, so their actual return from safe investments would be even lower. Because risk-free investments offer the smallest returns, pursuing higher income means accepting more risk. Treasury bills that mature in a year are an example… Read More

Risk is a fundamental part of investing. It might be easiest to understand by using bonds as an example.#-ad_banner-#​ With bonds, the only investment that is considered to be risk free is short-term Treasury bills. For now, risk-free investing offers a return of 0.04%. At that rate, $1 million in retirement savings will provide $400 in income. Most investors don’t have $1 million, so their actual return from safe investments would be even lower. Because risk-free investments offer the smallest returns, pursuing higher income means accepting more risk. Treasury bills that mature in a year are an example of how income and risk can be increased. This investment carries the risk that inflation could decrease the value of the principal invested in the bills. One-year T-bills are currently yielding about 0.1%, an amount that does not keep up with inflation. Investors are losing money, on an after-inflation basis, on all Treasurys with less than five years to maturity. This demonstrates that inflation risk might not be well understood by many investors because rational investors should not accept a nearly guaranteed loss in buying power. To beat inflation, investors are forced to accept what bond investors call credit risk. Read More