Beat Low Yields With This Safe Trading Technique

Amber Hestla's picture

Wednesday, January 18, 2017 - 12:00am

by Amber Hestla

If you're frustrated with the low yields this market has to offer, you're not alone. Finding dependable yields over 4%, much less double-digit yields, is nearly impossible in the current market environment.

For instance, the S&P 500 throws off a yield of just 2.1%. Even after the December hike, bonds are barely beating inflation, and the yields on blue-chip stocks are pathetic.

This had led some investors to "reach for yield," i.e., buy risky stocks with higher payouts. More often than not, this strategy leads to big losses.

To make matters worse, stocks are trading near all-time highs and carry lofty valuations. This makes owning them a riskier proposition than usual.

For conservative income investors in particular, this is an incredibly tough market to navigate. Fortunately, there is still a way to generate more income than you ever thought possible from the safest stocks out there.


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One Of The Safest Ways To Earn High Income
I have devoted my career to showing income investors how to generate outsized gains with simple, low-risk strategies.

Before becoming a full-time trader, I served as a military intelligence analyst for the U.S. Army. I began teaching myself about the market between deployments and was soon generating income that exceeded my regular military salary.

Today, I want to teach you about one of my go-to techniques: selling covered calls.

This simple strategy involves options -- a tool most investors don't use regularly because of their preconceived notions about options being risky. But when done properly, selling calls can be one of the safest and most lucrative ways for income investors to make money.

How Covered Calls Work
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, known as the strike price, before a specified date.

When you sell (or write) a call option, you have the obligation to sell a particular stock at the strike price if it should rise above that price before the option expires. I only recommend selling covered calls, which means you own the stock you're selling the calls on.

Essentially, covered calls allow you to get paid upfront to potentially sell a stock you own at a higher price sometime in the future. Whether the stock goes up or down, you can come out ahead.

That's not to say covered calls are risk-free -- no investment is. But they can actually help reduce risk.

Consider what happens when you sell a covered call:

For every option you sell, you receive income, known as a premium, upfront in exchange. This money is yours no matter what. It's deposited in your account just like a dividend.

Once you sell a covered call, one of two things can happen -- either the underlying stock rises in price or it falls.

If it declines in price, your shares will decrease in value, but you have the option premium to counter the loss. In other words, if the shares fall, you're better off selling covered calls than simply holding the stock.

If shares stay below the strike price through expiration, the option expires worthless for the buyer. That's not necessarily a bad thing for sellers, though, because this means we keep the shares and have a chance to sell another call to capture another income payment. This is why you should only sell calls on high-quality stocks you would be happy to own for the long term.

If the stock rises above the call's strike price, you will have to sell your shares to the option's owner. Anything between the price at which you originally bought the shares and what you sell them for is pure profit, in addition to the cash earned when you sold the option.

The only time you really give anything up with this strategy is if a stock's price soars past the strike price during the option's short life. In that case, you'll miss out on some capital gains.

I think that's an acceptable trade-off when you consider that, lately, my Maximum Income subscribers and I have been able to earn annualized gains of 9%, 42%, and 77% -- sometimes even reaching as much as 247%.

Take Ford (NYSE: F) for example. Back in September, we sold a covered call on the stock, bringing in $24 for every 100 shares we purchased. And we’re about to sell another call on the stock that will generate even more income on top of the January dividend. Assuming the new call expires worthless, the annualized return on our trades will be almost 50%. Meanwhile, Ford stock has only gained 4% during that time -- making our income play much more rewarding.

It's for this reason that I consider covered calls to be one of the safest ways to earn high levels of income in this low-yield environment. They're perfect for anyone from young couples struggling to make ends meet to retirees looking to pad their nest egg.

If you're interested in covered calls, I've put together a presentation showing how you can use them in your account to pocket an extra $3,000 a month. You can access it for free here.

Amber Hestla does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.