The Best Income Strategy in the World Right Now
By Tom Dyson
Friday, April 03, 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. |
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A BIG DEVELOPMENT IN THE EMERGING MARKET STORY
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...
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Fixed mortgage rates in the U.S. fell to a record low for the second consecutive week, signaling that Federal Reserve Chairman Ben Bernanke's effort to spur the housing market is gaining traction.
The 30-year rate dropped to 4.78 percent from 4.85 percent a week earlier, the lowest since records began in 1971, Freddie Mac said today in a statement.
Rates are falling to historic lows as the Federal Reserve ramps up purchases of mortgage-backed bonds to support home lending. Mortgage applications in the U.S. rose for a fourth consecutive week as a decline in borrowing costs prompted more refinancing.
– Bloomberg
General Motors Corp.'s new chief executive said Tuesday that he will not reduce his salary to $1 a year like his ousted predecessor, Rick Wagoner.
Fritz Henderson, GM's former chief operating officer, said at a news conference that his pay will remain unchanged now that he is head of the troubled automaker. His base salary as COO was cut 30 percent to about $1.3 million this year when GM accepted government loans.
Wagoner had agreed to accept a salary of $1 as part of the Detroit automaker's request for assistance. The company has been staying afloat because of the $13.4 billion GM has received since Dec. 31, and Wagoner stepped down as CEO on Monday as a condition for additional government aid.
– Associated Press
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