A Triple Dipper: How To Make 3 Profits On 1 Stock Trade
|
This is a rather simple strategy with which I am sure a lot of seasoned traders are very familiar, possibly under some other name with which I am not familiar. I wanted to write about it because I don't see anyone talking about it anymore. Since the big hey-days of day trading and, of course, the burst of the Internet bubble of 2000, there seems to be a lack of patience that this strategy needs to work.
A lot of people seem to be moving back into the markets since the declines of 2000. If you were one of those that jumped back in during the early part of 2004 you reaped big profits. But now there seems to be a fair number of Wall Street Pundits that are beginning to raise the "irrational exuberance" flag once again. If you have been watching some of the unrealistic gains in recent high flyers, you may be looking for a bit more conservative way of being in the market.
In the early 70's I met a young Dean Witter Reynolds broker and told him I had a few dollars I wanted to put into the stock market. The first thing he told me was that unless I had $100,000 I wanted to invest one time into a diversified portfolio with a buy and hold strategy?or?. $10,000 I wanted to invest in a more aggressive "trading" strategy, he was not interested in my account. Keep in mind, this was a long time before the day trading craze hit. I was impressed with his straightforward and honest approach. However, I did not have $100,000 back then, but I did have a bit more then $10,000. With that we were off to the races, and this is the trading plan he put to work for me.
First of all he stayed away form the high flyers altogether. He followed a number of solid, top quality companies that had a history of paying above average dividends but still with a little bit of volatility. Both the dividend and the volatility are required ingredients.
We bought six to ten positions with an average of 300-500 shares in each position. Every stock we bought paid higher then average dividend. We did well with companies like Phillip Morris [MO], American Electric and Power [AEP], Battle Mountain Gold Co. [now a pink sheeter], General Motors [GM] and few others. I only mention them so you that are nuts-o for research (exactly the sort of thing I would do) can go back and see the sort of movement we had in these stocks back in those days. There were others of course, but that will give you some fodder for research. GM and MO may still work these days, but I have not looked at AEP in years and, of course, Battle Mountain is history.
Okay, so now you know what sort of companies we are looking for; solid, higher then average dividend paying companies with a bit of volatility. Hey, I never said this was easy! But to make it even more challenging, we need one more component to make the triple dip into the money - Options. To be more specific, we need Covered Calls only!!! Let me repeat that, we are only selling covered calls, no other options. You will have to be cleared by your broker for options trading, and you will need a margin account.
Here's how the play is made. You buy 300-500 shares of a stock that is going to be paying a dividend with in the next 15-45 days. You sell the 30-60 day covered call taking in the premium money and giving you that amount of money downside protection to offset any move against you.
The ideal trade will play out like this. You will buy the stock, it will pay the dividend while you own it, you sell the Covered Call collecting the options premium money, and hopefully the stock will be called away at the strike price. Obviously, you have to make sure you only sell the call with a strike price higher then your entry price.
Now let's apply the math on a hypothetical trade. Let's say you buy MO at $50 and it is paying $.25 dividend and the $51 call option is selling for $.25 with an expiration date 45 days out. Let's further assume the stock pays the dividend, and moves above the strike price of $51 by the expiration date and it gets called away. You will earn $.25 for the dividend, $.25 for the premium money on the call and $1.00 on the stock position itself for a total gain of $1.50 on 300 shares. That's $300 on a $7500 investment (using 2:1 margin account) for a 24% annualized yield on your money. More of the math: $300 divided by $7500 = 4% X 8 = 24%. Keep in mind you made the $300 in 45 days meaning theoretically you can do this 8 times a year. That's how you get the 24% annualized yield. Not to shabby! (Because commissions vary, I have not put them into the equation, something you will have to do obviously.)
Seems pretty easy doesn't it? Well it is, when it works. But like everything in the stock market (or in life itself for that matter) there is no sure thing.
Any number of things can happen. Here are just a couple of things you have to consider. First off, I would check to see what all the analysts are saying about any stock you are about to try this on. Make sure the company has a solid dividend history. I would also caution against making the play on a stock that is due to report earnings while you are in the options period. Also keep in mind that as a general rule a stock will dip in direct relationship to the divided paid.
Obviously this strategy is not always going to play out as our hypothetical trade did. However, I have had results similar to that as well as some much better, and "yes" some that did not work at all. What makes the play less risky than the stand alone buy and hold trade is that no matter what the stock does, you get the dividend and the options premium money giving you that much downside protection on a move against you.
I had a number of stocks that I would hold in my account and merely roll over the option money and collect the dividend on a regular bases, double-dippers, and was very happy not to have the stock called away.
I was very fortunate that I had met a broker who became one of my best friends and taught me this method of investing. I strongly suggest that you seek the advice of a professional broker; money manager; your attorney; your accountant; your present, past or future wife or husband; your doctor; your heirs, your auto mechanic or anyone else in the world that you can think of before you try this or any method of investing. (Okay, I think that covers about everyone.)
To learn more about Covered Call writing, check the resources at http://www.TraderAide.com. Good luck and happy trading!
No permission is needed to reproduce an unedited copy of this article as long the About The Author tag is left in tact and hot links included. We do request that we be informed of where it is posted so reciprocal links can be considered. Email floyd@sbmag.org.
Floyd Snyder has been trading and investing in the stock market for three decades. He was on the forefront of the day trading craze that swept the nation back in the late1990's both as a trader and as the moderator of one of the Internet's largest real time trading rooms. He is the owner of http://www.TraderAide.com, Strictly Business Magazine at http://www.sbmag.org, http://www.FrameHouseGallery.com and http://www.EducationResourcesNetwork.com
|
|
|
Online Broker Trade History Not Doing The Job
Let me start by saying that...Most online brokers do not make it easy for their clients!There are absolutely no standards for trade history reporting from one broker to the next. This presents a real challenge for any trader who wants to analyze his or her trade history.How does one get their trades into some sort of trade analysis software or spreadsheet? How can this be done for several different brokers?What do they provide?Some brokers provide simple trade history reports while others provide very complex statements or reports which have so much HTML formatting that it makes it virtually impossible for any one to copy and paste the information into ...(related: Stocks)
Choosing A Stock Broker
If you were to find that you had some severe illness that required surgery, would you attempt to perform that surgery upon yourself? What if your car broke down and needed a valve job? Would you get out the Craftsman tool set you got for Christmas three years ago and start tinkering under the hood even though you know absolutely nothing about engines? Of course you wouldn't do either of these things because there are times in life when we know we must seek the assistance of a professional. So why is it that so many people try to make...(related: Stocks)
Protect Your 401k
Checked your 401K lately? Going back to about a year ago many of these retirement accounts have shrunk by 30%, some even more. What Happened?You have been putting money in for years and your employer may have been contributing to your plan also. It is not supposed to get smaller. You are planning to spend that mon...(related: Stocks)
Jack And Jill
Jack and Jill went up the hill to fetch abucket of ?money. Money? They are continuingto fill their bucket with stocks without anyconsideration to the value of these equities.They are not worried at all as they are buying"safe" mutual funds.Everyone knows mutual funds are safe. Jackand Jill know they don't know how to pick goodstocks so they leave that to the fund manager.He is an expert.When y...(related: Stocks)
Long-term Investment In Todays Market?
The stock market is very unstable at this time going up and down while interest rates are so low you want to be a borrower and not a lender. Would you like some suggestions on how can you get the most out of low interest rates while being assured your principal will not disappear while you are trying to make some money? Of course, there is always the danger of borrowing the money and then spending it just because it is there.So, would you also like to know what is the best way to borrow money at today's low rates without spending it? Buy real estate. Not any real estate but real estate that will hold its value, even if single family houses go down. It is apartment buildings. Because apartment rents are still going up, the valu...(related: Stocks)
Money, Insanity And Wall Street
Money: the most charged word in the planet. It means something to everyone. For some, money means a blessing, for others it means a disaster.We all have heard stories of people who have lost their fortunes or their life savings trading in the stock market; but, we don't hear much of people who are currently trading and how their lives are turning upside down.For some, the process of trading is like the development of an addiction, it starts with expectations, with hopes of a relief, with desire to control money or acquire more...(related: Stocks)
Quality Investment Information: Standing Firm In The Face Of Opposition
THERE'S SOMETHING TO BE SAID FOR standing firm in the face of opposition. Interestingly, most of the best stock decisions have come at times when the mainstream is saying precisely the opposite. Predictions like these can be valuable if one is to build an investment strategy around their view of the world.The appraisal by the minority over the past few years that inflation would return (while most of Wall Street was bemoaning DEflation) has proven to be true. As we've pointed out in the past, it can be readily observed in oil prices, real estate, and dozens of other commodities where no source of cheap imports is available.As Steve Forbes remarks in Forbes Magazin...(related: Stocks)
Dont Spend Another Dollar On Business Opportunities Until You Read This
With an insecure job market, overworked employees,insufficient retirement savings and parents wanting theoption to stay home with their kids, it is notsurprising that many individuals are taking the leapinto online business opportunities.The need to create a secondary income is a smartmove for people wh...(related: Stocks)
Losses, Not Profits, Will Stop You From Trading In The Market
Should the market turn against you, it is important that you design a system that will produce as much loss as you are prepared to take. This loss, known as drawdown, is the maximum amount by which your trading float will temporarily drop at anytime. Doing this in advance, will help you avoid nasty surprises in the future. This gives you the confidence to continue trading when the good times start once more.It is very unlikely that you will stop trading if your system is trading profi...(related: Stocks)
Learn To Calculate A Stock?s Pivot Point
Stocks breakout from properly formed bases everyday but many investors don't understand how to locate a pivot point or what patterns to study that may contain this very important buy signal. A pivot point can be described as the optimal buy point or the area at the end of a familiar base pattern where the stock breaks out into new high territory. William O'Neil, the founder of Investor's Business Daily is considered the pioneer of the pivot point in modern times. As Jesse Livermore explains in his book (1941), the pivot point can also be described as the p...(related: Stocks)
site-map - Copyright © 2006 | Contact Webmaster | All Rights Reserved. | Stocks