By
Tom Dyson, publisher, The Palm Beach Letter
Friday, April 3, 2009
"It's just incredible, Tom," writes a 12% Letter reader. "I've received 14% in income payments from Microsoft... and the stock hasn't done a thing."
I love receiving letters like this. It tells me word is getting out on the best income strategy in the world right now. The reader goes on...
I put up an initial investment of $38,450 for 2,000 shares of Microsoft. Then I sold call options against my position. I collected a 5.9% "dividend" and the calls expired worthless about a month later. I sold another round of calls. Got a 5.6% "dividend" for about two months on those. That round expired worthless, too.
Just sold another round that expires in a month. I received "only" $920 for those. I also received a $260 cash dividend this month. Total cash flow is $5,600. Love that 12% Letter cash machine!
My subscriber's trade is an excellent example of the opportunities available right now when you marry the world's best blue-chip stocks with the bloated option premiums in the market.
The bear market caused option premiums to soar by as much as 300% from where they were in the "happy" markets of 2006 and 2007. Suddenly there's big money to be had by selling options. And that's what my subscriber is collecting from his Microsoft investment.
To earn these option premiums, my reader was selling the upside potential in his Microsoft holding to speculators in the option market in return for large upfront cash payments.
These cash payments are called "option premiums." The regular cash flow you receive from these option premiums resembles a steady dividend income, so we call this strategy the "dividend capture."
If Microsoft's stock had risen, my reader wouldn't have made as much money. That's because he'd sold the upside in return for the upfront cash payments. Sometimes, this wouldn't be a good strategy... But in a bear market, or a "trendless" market, it works wonderfully.
Now here's the key to this strategy: Most people try covered calls on risky stocks... like high-flying tech companies or fad retailers. These companies are speculative and volatile... so the options market pumps up their premiums. The novice investor likes to "grab" those big premiums... only to see his overall return damaged when the fad stock suffers a big decline.
That's why you should stick with big, blue-chip businesses trading for cheap valuations. It's a much safer way to earn income.
Microsoft is a perfect example of such a position. It's a darn cheap stock... and a solid backstop you can use to safely make 14% in just over three months.
That's a fantastic yield from one of the best businesses in the world. If you're interested in this sort of safe, steady income, I encourage you to become familiar with this strategy today.
Good investing,
Tom
P.S. You can start earning safe 15%-20% yields on the best businesses in the world with a trial subscription to The 12% Letter. I think it's easily the best strategy in the world today for conservative income seekers. You can learn more about the "dividend capture" here.
Update on that emerging market trend we covered a few days ago: Brazil – one of the "bell cows" of the emerging market herd – just staged a big "breakout" yesterday...
What the heck is a breakout? Nothing complicated. It's simply when an asset punches through to a new price, high or low. Watching for breakouts can make you a heck of a lot of money.
You can make the case for a stock, market index, or commodity to enter a big price move... but if the market doesn't agree with you and heads in the opposite direction, you can't fight it. You have to put your ego and hopes aside. You have to wait for the market to "break out" a bit in your favor. This amounts to waiting until the market agrees with your analysis.
As you can see from the chart below, the market agrees with our emerging market rebound thesis. The popular Brazil fund just "broke out" to a new six-month high yesterday. The market likes this trade. And it's the only opinion that counts...
Friday, March 27, 2009 The "Ron Paul of England" in a MUST SEE video We wish this guy would come to America and say this to the lying, thieving bastards in Washington. If Ron Paul was this eloquent, he'd be President for life.
This Crisis Is Just Starting to Hit the Headlines By Dan FerrisThursday, April 2, 2009
I wish I were wrong about this. And I have nothing against any of the companies involved. Many are well run and, until now, had decent track records as good investors.
Why Gold? This Man Taught Me Why... By Dr. Steve SjuggerudWednesday, April 1, 2009
The thing is, it was never about the gold to Burt... it was about a moral and philosophical stance. Sure, you got gold at a great price from Burt, but you had to pay the "Burt Tax" to buy it...
Profiting in the 'Global Ice Age' By Dr. Steve SjuggerudTuesday, March 31, 2009
I caught up with Jack over the weekend in St. Petersburg to see how he feels about the dollar and the euro now. I asked him to expand on his "Global Ice Age" idea… and explain how we can profit from it in the currency markets...
You Have No Choice But to Be Long Commodities By Tom DysonMonday, March 30, 2009
Nothing's ever certain in the stock market, but if you had to bet on an asset rising tomorrow, would you bet on the one that's already rising or the one that hasn't moved?
