Options are not just speculative tools – they are also at the heart of an aggressive, low risk income strategy. Yes, income. And yes, low risk – especially compared to the risk of buying an option. And since we are talking about since and options in the same breath, let me show you one of my favorite tactics – and stocks – what I call a double (or triple) dividend play.
One of my favorite companies – and stocks – is Verizon (NYSE:VZ). Verizon is a great play on the explosion in the use of mobile devices and announced its intent to buy back the half of Verizon Wireless it does not own – trading off its balance sheet to boost earnings – if it can get the deal done. I see VZ as a growth stock that throws off some income – the yield is a smidge below 4%. Not acceptable if you are truly an income investor – except the appreciation potential for the shares is much better than for most income stocks. I first recommended VZ to subscribers at $40.60. It is now right around $53-$54. You get the point – I still see it running to $64 or more in a year or two.
And along the way you can generate some serious income selling weekly or monthly calls. Here is some simple math.
If you buy the shares and then sell a weekly $54 call – as of this morning’s writing – and you get called out you will generate $48 in cash per 100 shares. Do that fifty times a year – the only way to calculate an annual return – and you net $24.00 a share – a return of 44%, not the little dividend under 4%. If you don’t get called out, you still net around $25 per 100 shares or $1,250 per year – a return of 25% or so.
Plus the little dividend of just under 4%.
If weeklies are not your thing, you can do this with monthlies. Buy the shares and sell a June $55 and you get called out and boom, you net $1.97 per share. That is a 3.7% return in a little more than two months, an annualized return of 29%. Even if you do not get called out, you have an annualized return of 11% – plus that dividend of 3.8%.
The typical options trader prays for a 100% return because that is what all the expensive books tell them they should shoot for. How many options traders can consistently generate profits that end up being 100% on an annualized basis? Me too. On the other hand, the options seller owning an income stock that is appreciating and generating between 15% and 48% a year, depending on the market and how busy they want to be, that is something I can relate to.
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