The Single Best Income Strategy Ever Created Just Got Better
By Jeff Clark
October 2, 2008
Everybody needs cash.
Wall Street needs it. Big businesses need it. And small businesses are hurting for it.
But no one needs cash more desperately than the individual investor. At least, that's the take I got from reading September's Money Magazine.
In The Best (And Worst) Ways To Raise Cash Right Now, the authors suggest investors who need cash can "withdraw money from your 401(k) plan" or "borrow money from your parents."
Huh? Why not just tell readers to "sell your blood" or "enroll in an experimental drug trial?"
The truth is, there's a much better way for investors to generate cash. You won't find it in Money Magazine. But I'll share it with you today.
It's called covered call writing and it's the single best income generating strategy ever created.
The idea is simple. You buy a high-quality stock at a cheap price and then sell to someone else the right to buy the stock from you at a higher price. You collect cash up front for selling that "right," and the money appears in your account immediately.
I've used this strategy for years to generate income, protect my portfolio from any modest downside moves, and create high rates of return. It's a wonderful strategy that works best when stocks are cheap and options are expensive.
And there's no better time than right now for selling covered calls.
Stocks are cheap. The S&P 500 is trading at the same level it was nearly five years ago. High-quality blue-chip stocks are trading for less than 10 times earnings. And much of the downside risk has been taken out of the market.
Buying stocks today is certainly less risky than buying them last October, when the S&P 500 was 25% higher.
And option premiums are expensive. In fact, options are more expensive now than they have been in the past 10 years.
Take a look at this chart of the CBOE Volatility Index (VIX)...
The VIX helps measure the price traders are willing to pay to buy stock options. The higher the chart, the higher the price of the options.
As you can see, option prices are higher today than they have been in years. So sellers of covered calls can pocket more cash.
Here's an example of some of the opportunities in today's market...
You can buy Intel (INTC), the country's largest semiconductor manufacturer, at about $18.50 per share. The stock yields 3% and is at the bottom of most historical valuation measurements. And you can collect an immediate cash return of $1.20 per share by giving someone else the right to buy INTC from you for $20 between now and January 18.
That's instant income of 6.5% for giving someone the right to buy the stock from you at an 8% gain in just over three months.
You can also collect a 6% immediate cash payment by buying Microsoft (MSFT) at $26.60 and selling someone else the right to buy it from you between now and November 21 at $27 per share. That's a 6% return in just six weeks... and you can collect it tomorrow.
Once all of these options expire, you can sell some more calls against your shares and raise even more cash. It's as if the option market is erupting in cash. And all you have to do is reach out your hand and grab some.
Buy cheap stocks and give someone else the right to buy them from you at a higher price. You'll get paid cash right away, reduce your downside risk, and still have the potential to profit on modest upside moves.
It sure beats asking your parents for a loan – or selling your blood.
Best regards and good trading,
Jeff Clark
Editor's note: Jeff Clark is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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