The new all-time highs we’ve seen in the Dow and the S&P 500 may have gotten a lot of media attention — but it’s important to keep in mind that this isn’t your Dad’s stock market. It’s a heavy-handed market with massive government involvement, where 70% of the daily trading volume is being attributed to high-frequency, computerized trading.
This is what has kept millions of investors out of the euphoric rally, aside from gains realized in retirement plans. And that’s no small issue, as retirement funds account for the majority of investable assets.
That’s why covered call trades, like the one I have for you today, are the ideal way to bring in short-term income. After all, trades like these work no matter what happens in the rest of the market…especially when those very same all-time highs are so quickly lost due to headline risk, as we’ve seen in the last couple of days. Best of all, as I’ve mentioned before, they’re great for just about any investor.
MGM Resorts (MGM) is showing just the kind of setup I like for selling covered calls. After posting a Q2 report on Tuesday that “beat the Street” on both profits and sales, the shares broke out to new highs and seems to have limited upside from here.
Here’s the trade: for every 100 shares of MGM that you own (or buy), “sell to open” 1 contract of MGM September $18 calls. The option closed at $0.50 on Wednesday — so selling the calls at that level would earn you $50 per contract upfront. (For example, your total option premium for selling 5 calls would be $250, or $500 for 10 calls, and so on.)
Come September expiration day, there are two potential scenarios of how this plays out, and I’ve designed the trade so that you’ll turn a profit either way. The first is that MGM stays about where it is now (about $17) or lower – in which case those $18 strike calls would expire worthless. Your obligation would end there, so you’d be free to pocket that option premium and either look to sell the stock for a small gain, or hold it — and possibly sell more calls in future months.
If MGM does rise through the $18 level, then your potential gain on the “called away” position is 9%, based on your entry at $17, the option premium of $0.50 and your strike price of $18.
I often hear from investors who are looking for new ways to supplement their income and participate in the big rally they’ve heard so much about…which after all is mainly driven by blue-chips like MGM that don’t pay dividends. Well, selling covered calls is a great way to take advantage of the price action and insulate yourself against further downside at the same time.
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.