Now, full disclosure: I’m normally focused on income stocks. But I’ve found that many investors are seeking more than just the capital gains from buying and holding the names that typically come to mind for dividends–Coca Cola (KO), Johnson & Johnson (JNJ), and the like. And even the most risk-averse income investors around can benefit from my favorite low-risk options strategy–the covered call.
As I’ve written before, this method of selling call options against a long stock position is a quick, easy way to bring in additional income from option premium. And unlike a lot of other trading strategies, it’s typically allowed in IRAs and similar accounts, which makes it perfect for retirees.
Click to Enlarge Goodyear Tire (GT) is a name that everyone knows. It’s a global powerhouse, and as you can see in the chart, from a technical standpoint the stock is showing the kind of pattern that’s a great set-up for a covered-call trade. That’s because it’s in an uptrend — but one that seems to have limited upside in the short term.
My recommendation for GT is that for every 100 shares owned (or purchased), you “sell to open” one contract of GT Aug. $17 calls at $0.75. The total option premium you’d receive for selling the call would be $75 per contract — $375 for five contracts, $750 for 10 contracts, and so on.
If GT stays where it is now (about $16.50) or lower, the calls will expire worthless; you will have pocketed the option premium and will be free to either trade the shares themselves – or to sell calls again in future months. If GT does rise through the $17 level, then your potential gain on the position is 7.6%, based on an entry at $16.50, the strike price of $17 and the $0.75 in option premium.
When it comes to generating short-term income, that’s one of the ideal strategies, in my view. After all, GT doesn’t pay a dividend…and with the shares already up more than 27% for the year-to-date, who knows how long you’ll have to wait for another 8% rise in the underlying stock? This way, you’ll either pocket a small gain and move on — or you’ll get paid to wait for that capital-gains appreciation, in the form of option income.
Bryan Perry is the editor of Cash Machine, a newsletter focused on high-yield income investing with a the goal of maintaining a blended total yield of 10% across two portfolios. Bryan is also the editor of Extreme Income which uses the power of historically cheap money to create a leveraged “baby hedge fund” strategy that paves the way to massive profits and 4x greater income.
Stay tuned! Bryan is currently working hard on a brand new strategy that amplifies your income potential by utilizing a conservative options strategy based on stocks you may already own.