How to Turn Your Stocks into ATMs

Transcription

1 A Publication of The Sovereign Society How to Turn Your Stocks into ATMs By Chad Shoop The Sovereign Society 55 NE 5th Avenue, Suite 200 Delray Beach, FL USA USA Toll Free Tel: (888) Contact: Website: 1

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3 I m sure we ve all done it. How to Turn Your Stocks into ATMs You buy a stock hoping it will move much higher. Instead, it doesn t move at all for months. So you get stuck with a stock that s going nowhere. It can be really frustrating. And if the stock doesn t pay a dividend, you don t make any money. If it pays quarterly dividends, you still have to wait three months to get a check. But what if you could extract money from this stock every single month? What if you could turn it into your personal ATM? Well, there s a strategy that allows you to do just that, and we ll be using it in Pure Income. This strategy will allow you to immediately extract cash from your equity positions even if a company doesn t pay dividends. And the payments you receive can be larger than typical dividend distributions. How to Extract Cash from Your Equity Portfolio I m talking about selling covered calls. Let me explain how it works. When you buy a call option, you re buying the right (but not the obligation) to buy a stock at a set price at an agreed upon future date. As I mentioned in The 5% Monthly Income Secret report, it s extremely hard to make money buying options. So we ll look at the other side of the trade. We ll only sell call options. When you sell a call option, you re selling someone else the right to buy your stock at a set price in the future. We re taking the cash up front and agreeing to sell the stock we own for more than we ve paid for it. Selling covered calls simply means we own enough shares to cover the liability should the buyer of the call option exercise it, forcing us to sell our shares. In other words, we ll have our shares called away. When you sell a call option, you collect the premium regardless of what happens. But the trade has two possible outcomes: 1. The option expires worthless and you collect the entire premium without any obligation; 2. The buyer exercises the option and you end up selling your shares at the strike price. Let s take a closer look at those two possible outcomes. And I ll show you why selling call options is a great way to boost your income. 1) The Option Expires Worthless Let s say we bought shares of Microsoft Corporation (MSFT) at $25. As of October 17, 2012, the stock is trading at $ So we have a gain of about 18%. And we also collected a dividend of $0.20 last month. But we want more income, and Microsoft won t pay another dividend until mid-december. That s where covered calls come in. We ll sell the January 31 call option. The option s current price is $0.60. But since one option contract covers 100 shares, we ll collect $60 ($0.60 x 100) for every contract we sell. 3

4 The Anatomy of a Call Option Premium: The option s price. This is the amount we ll collect when we sell calls. Expiration Date: Stock options expire on the third Friday of the month. Exercise: When a call buyer exercises his option, he engages his right to buy the stock at the strike price. Strike Price: The price at which the buyer can exercise the option. When you sell a call option, you are required to sell shares at the strike price, if the buyer exercises his option. In the Money: Calls are in the money if the price of the stock is HIGHER than the strike price. (A call with a $31 strike price is in the money if the stock is trading above $31, for example, $32.50.) Out of the Money: Calls are out of the money if the price of the stock is LOWER than the strike price. (A call with a strike price of $31 is out of the money if the stock is trading below $31.) This recommendation would look like this in my trade alert: Sell, to open covered, the MSFT Jan call (MSFT130119C ) for about $0.60. So we re getting other investors to pay us up front for the right to buy our shares at a price 24% higher than the purchase price doesn t that sound great? And keep in mind that the premium we collect in this case is three times the dividend Microsoft paid us. We ve tripled our dividends, while locking in a higher price for our stock. And, as long as we continue to hold the stock, we can sell other rounds of calls to generate more income. Now, let s take a look at the risks of this strategy. 2) The Buyer Exercises the Option The second outcome is that our shares are called away. If the stock closes above the strike price at expiration, we ll keep the premium and sell our shares for the strike price. So our profit is equal to the premium plus the difference between the prices at which we bought and sold shares (the capital gains. Let s go back to our Microsoft example. Let s say Microsoft closed at $32 at expiration date. The buyer will exercise the option, and we ll have to sell our shares for $31, the strike price. So we get $6 ($31-$25) in capital gains and $0.60 from selling the option for a total gain of $6.60. That s a total gain of 26.4%. That s the worst case scenario! A 26% gain sounds pretty good to me. Of course, by selling call options we limit our upside potential. That s the catch of selling covered calls. We sell off our potential for enormous gains. If Microsoft jumps to $60, for example, you could be kicking yourself for selling the stock for just $31. But the purpose of selling covered calls is to generate income, not capital gains. As the name suggests, our focus in Pure Income is to generate income. Any capital gains are a bonus. I will tell you this we won t sell call options on stocks we think have lots of upside potential. So we ll only sell calls against stocks we wouldn t mind selling at the agreed upon price. 4

5 You can also use this strategy in IRAs, which give you the additional benefit of deferring taxes. Selling covered calls is one of the easiest and most profitable income-generating strategies you ll ever see. So make sure you read my report How to Unlock Your Account for Extreme Income to learn how to set up your account for call selling. Regards, Chad Shoop 5

6 The Sovereign Society 55 NE 5th Avenue, Suite 200 USA Toll Free Tel: (888) Website: Legal Notice: This work is based on what we ve learned as financial journalists. It may contain errors and you should not base investment decisions solely on what you read here. It s your money and your responsibility. Nothing herein should be considered personalized investment advice. Although our employees may answer general customer service questions, they are not licensed to address your particular investment situation. Our track record is based on hypothetical results and may not reflect the same results as actual trades. Likewise, past performance is no guarantee of future returns. Certain investments such as futures, options, and currency trading carry large potential rewards but also large potential risk. Don t trade in these markets with money you can t afford to lose. Sovereign Offshore Services LLC expressly forbids its writers from having a financial interest in their own securities or commodities recommendations to readers. Such recommendations may be traded, however, by other editors, Sovereign Offshore Services LLC, its affiliated entities, employees, and agents, but only after waiting 24 hours after an internet broadcast or 72 hours after a publication only circulated through the mail. For transparency s sake, we want you to know that we have an advertising relationship with Swissmetal, Inc. and as such, we may receive fees if you choose to invest in their products. In addition, we receive a marketing fee based on our relationship with EverBank. (c) 2014 Sovereign Offshore Services LLC. All Rights Reserved; protected by copyright laws of the United States and international treaties. This Report may only be used pursuant to the subscription agreement. Any reproduction, copying, or redistribution, (electronic or otherwise) in whole or in part, is strictly prohibited without the express written permission of Sovereign Offshore Services, LLC. 55 NE 5th Avenue, Suite 200, Delray Beach FL HTT.SVS.VI