Why Aren't More Investors Earning Income This Way?

Brad Briggs's picture

Tuesday, July 25, 2017 - 12:00am

by Brad Briggs

I can't believe more people aren't taking advantage of this...

For the past few years, my colleague Amber Hestla and her readers have been "skimming" from Wall Street. And the best part: it's all perfectly legal. In fact, it's one of the safest methods of earning extra income to be found in any market environment.

Allow me to explain...
With bond yields near record lows and traditional income securities like savings accounts and certificates of deposit earning next to nothing, we're regularly finding "instant yields" as high as 9.2%... 13.7%... and even some as much as 19.8%.

In the past, our research has delivered opportunities to collect a $1,575 cash payment from well-known stocks such as Visa (NYSE: V) for a 7.8% yield... a $980 cash payment from Starbucks (NYSE: SBUX) for a 12.8% yield... and, as I'll show you today, we've even earned a $1,608 payment from International Business Machines (NYSE: IBM) for an 11.5% yield.

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The best part thing about these "instant yields" is that there's nothing complicated about them. To collect, you don't have to monitor your brokerage statement daily. Nor do you need a million-dollar bank account and access to a high-powered financial advisor.

In fact, all you really need is 100 shares of a single stock -- and the willingness to sell those shares for a profit. Let that sink in for a moment...

I'm talking, as you might have guessed, about selling covered calls.

A covered call strategy involves selling call options on stocks that you already own. In exchange for selling the options, you receive upfront payments known as premiums. These premiums can range from a few hundred dollars to $10,000 or more, depending on the size of your investment.

In exchange for paying the premium, the buyer now has the "option" to buy that stock from you for a specific price, known as the option's strike price. Whether or not he exercises that option depends on the stock's price the day the option expires.

If, on that day, the stock is trading above the option's strike price, you'll be required to sell those shares -- usually for a profit -- to the option buyer. If the stock is trading below the option's strike price, then the option expires worthless and you keep the premium with no further action required on your part.

Think about that for second.

I don't know anyone who buys a stock without wanting to sell it eventually. Even long-term growth investors usually have a price target for most of their underlying holdings.

So why not get paid while you wait for your stocks to get there?

That's essentially what covered calls allow you to do. By selling covered calls, you're generating a constant income stream while waiting for your stock holdings to appreciate in value.

Since you already own the stocks you're writing the options on, and you're willing to sell those stocks when they reach your target price, employing this strategy adds zero additional downside risk...

But at this point you're probably wondering: What if the stock declines in value?

In that scenario, selling covered calls can only help you.

Remember, to sell covered calls, you have to actually own the stock you're writing the option on. So regardless of whether you use this strategy, your portfolio is still going to take a hit from the declining share price.

But the beauty of covered calls is that they let you offset some of the damage. That's because for every premium you receive, you simultaneously lower your cost basis in that investment.

To see how it works, consider how we've done this with International Business Machines (NYSE: IBM) in the past. Keep in mind, this is a past example where we've earned "instant income" -- so the numbers are going to be a little different. But I think you'll get the point.

Things have not been particularly great for "Big Blue." The IT services company is down about 9.5% over the past year, while the S&P 500 has gained 14%. This has come on the back of a difficult run during the past couple of years, as the venerable tech giant has struggled to once again adapt to the changing needs of the tech marketplace.

As a result of that lackluster performance, I'm willing to bet most IBM shareholders lost money on the stock during the past 12 months.

But for people selling covered calls, IBM wasn't nearly as much of a disappointment. In fact, chances are those investors actually made money on the stock last year.

That's because for most of the year, options investors were able to generate anywhere from $200 to $400 every two months by selling covered calls on IBM.

Just how much they received depends on both the length of the contract (how long until the option expires) and the value of the strike price.

For example, back in August of last year, IBM traded near $155 a share -- very close to where it sat in August 2015. In order to generate what we call "instant income," investors could have sold November $160 calls on IBM for about $2.68 a share. Since each contract controls 100 shares, the trade would generate approximately $268 in "instant income." As long as IBM wasn't trading above $160 on November 18 last year (the day the option expired), you could have retained your shares and kept the premium you collected as pure profit.

Since in this example the trade lasted roughly two months, you could have repeated this process six different times over the course of a single year. Assuming you are able to get that same $2.68 premium every time you sell a call, you would essentially lower your cost basis by $16.08 ($2.68 x 6) for each share of IBM you own during that period.

It also means you could have earned as much as 11.5% by investing in IBM. And that's before even considering IBM's dividend, which was 3.6% at the time.

Alas, by the time November 18 rolled around, shares hit $160. In that scenario, all you would have had to do was sell your shares for a profit. The $2.68 premium was still yours to keep. You also would have received a $1.40 dividend check during that time. That's a nearly 3% yield on your money for less than a three-month holding period. Not a bad tradeoff, especially considering IBM is now trading hands for about $147. 

That's the power of this strategy. Regardless of what your portfolio looks like, you can dramatically juice your returns by selling covered calls. All you need is at least one stock you're willing to sell at a profit if it jumps higher.

This strategy works great for big blue-chip companies like IBM that are unlikely to jump big anytime soon. And even if they do, you're still getting paid to sell for a profit. But you can earn even more income -- and get even higher returns -- if you're willing to use this strategy on companies that aren't as well known.

Editor's Note: Selling covered calls is as close as you'll get to a "win-win" in investing. It's so easy that, as I mentioned earlier, we like to think of it as "skimming" from Wall Street. That's exactly what Amber Hestla and her Maximum Income subscribers are doing each and every month.

Don't let the fact that we're talking about options fool you... this is one of the easiest, most conservative methods of earning extra income around. To find out more about the benefits of covered calls, follow this link

Brad Briggs 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.