Editor's Note: This article is one of our favorite "hall of fame" articles, originally published January 13, 2014. In this piece, Austin Hatley explains how Profitable Trading's Amber Hestla uses a unique strategy to safely boost her income stream every month from blue-chip stocks like Microsoft.
Due to timing differences, some of the original numbers listed in this article have changed, but you should still be able to get the gist of her strategy nonetheless.
Right now you can earn big, double-digit "Instant Yields" from some of the safest stocks in the world.
This isn't some investment gimmick, either. The payouts I'm talking about are settled in cash. That is, every time you get one of these payments, the money is added to your brokerage account immediately.
Take a gander at the incredible yields we're finding from some of the market's best-known stocks...
At first glance, these payouts may seem impossible. After all, a quick look at Yahoo Finance tells us that all of the stocks listed above pay dividend yields of only 2% to 5%.
So how are investors earning so much income from giant brand name stocks like Coca-Cola, AT&T and Microsoft?
It's easy. They're selling covered calls.
On the surface, selling covered calls seems like a complex concept. It involves options, an investing tool most investors don't know much about to begin with.
But used properly, selling covered calls can be one of the market's most lucrative investment strategies -- especially for income investors. That's because covered calls allow market investors to take advantage of the dividends from their holdings -- while also collecting extra "instant income" checks on the side.
Profitable Trading's resident options expert, Amber Hestla, explains how it works in her most recent research report, "How To Earn Thousands More From Stocks You Already Own":
When we write a call option contract, we create a contract that says we will sell the underlying shares to the option owner at the specified price (called the "strike price"), if it is met.
In return, we receive a cash payment upfront from the option buyer. Depending on how many of these contracts you sell, the payments you receive can reach well into thousands of dollars.
A "covered" call is when you personally own the underlying shares for the option you write. This helps reduce your risk, while making it easier to access the huge payments available from writing call options.
Best of all, if the stock stays below the "strike price" you specify in the option contract (you get to choose the strike price), then the option is said to expire worthless. That's good for us.
To see how covered calls work, let's take Microsoft as an example.
How To Earn 24% Yields From This Software Giant
Almost every person on the planet has heard of Microsoft. The company's flagship product line, its Windows operating system, is installed on nearly 90% of computers around the globe.
As such a powerful player in the tech industry, you wouldn't expect Microsoft to offer investors much of an opportunity to snag big yields. And in fact, by itself, the stock is only paying $1.12 a year in dividends -- or 3.1% annually.
But while 3.1% isn't bad (especially considering the S&P 500 pays only 1.9%), it's only a fraction of the income you can earn from this tech giant. As we said earlier, we've found a way to collect $846 in cash -- equal to a 24.2% yield -- by selling covered calls on it.
Here's a step-by-step breakdown of how that trade would look...
The first step to executing any covered call strategy is to make sure you first own the underlying shares of the security (that's what the "covered" means). For Microsoft, that would include going out and buying 100 shares (more on that in a second) of the stock at today's share price of $34.92.
Once you've bought the shares, now you're ready to write a "call" option on them. While that may sound like a difficult process, it's really not. Just tell your broker that you would like to sell a covered call, and they'll be happy to execute the trade for you. You can even use this strategy with most retirement accounts.
The amount of money you receive in "instant income" from selling the option depends on how high you set the strike price away from the stock's current price. The closer the strike price is to its current price, the more money you receive in premiums.
Right now you can sell February calls on Microsoft with a $35.50 strike price for $0.94 a share. Since each contract represents 100 shares, we would collect roughly $94 in "instant income" the day we sell the option ($0.94 x 100 shares).
If on February 14 (the day the option expires) Microsoft is trading below $35.50 a share, then we would retain the shares, and the money we collected from selling the option is ours to keep as pure profit.
If the reverse happens, and Microsoft is trading above $35.50 the day the option expires, then we would still get to keep the $94 in instant income, but we would also be required to sell the shares for $35.50 -- almost a dollar above where we purchased them.
It's something of a win-win strategy: Regardless of whether the option you sold expires worthless or not, you're still going to make money in the trade.
But the best part about this approach as that as long you own the underlying stock, you can continue to sell covered calls on it -- capturing big "instant income" checks every time.
To see how this works, let's stay with the Microsoft example.
If we continue to write covered calls on a rolling six-week basis, we could potentially sell nine covered calls on the stock over the course of this year alone. Assuming we receive a similar amount of "Instant Income" for each contract, the options would generate $846 (9 x $94) in additional earnings annually. Considering our initial investment of $3,492 (what we paid to buy 100 shares in the first place), by selling the covered calls we would generate a 24.2% annual yield on investment.
And that's from a big, well-known company like Microsoft. The returns get even bigger if you're willing to travel off the beaten path.
P.S. -- If you think traditional investments are going to pay for your retirement... you've been duped. According to new research, as many as 82% of investors will NEVER be able to achieve a true retirement. Amber is helping her readers close this "retirement income gap" by showing them how to sell covered calls to earn as much as $3,410 every 35 days. If you're even remotely concerned about your retirement and want to know more about this strategy, you can check out her report by visiting this link.