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Make 5% in Two Weeks and Then at Least 3% Every MonthBy Jeff ClarkThursday, July 22, 2010 It was an honest mistake.
Nancy, the host of the neighborhood Independence Day barbeque, asked me to get a bag of pancetta out of the freezer in her garage. I went to the freezer and grabbed a bag labeled "bacon" – thinking that was suitable to complete my task.
As I unwrapped the tinfoil, however, I uncovered a stack of $100 bills. There must have been $20,000 in frozen cash tucked away in that Ziplock bag. "Is there something you might want to tell me?" I joked.
"Yes," she said. "Bacon isn't the same as pancetta. We'll talk about the rest later."
After the barbeque, Nancy and her husband, Gus, confided in me they had over $80,000 in cash stored in various locations throughout their house. "It just didn't make sense," Gus said, "to let the bank hang on to our cash without paying us any interest."
"The stock market is too risky," he continued, "and I really don't know what to do other than stuff it in my freezer in case of an emergency."
"What if," I responded," I could show you how to make 5% over the next two weeks and then at least 3% per month, every month from then on?"
Their eyes lit up as I shared with them the trade I recommended to my Advanced Income subscribers last month. We bought a beat-up oil stock and sold covered calls against the shares. Essentially, we traded some upside for guaranteed income. Here's how it worked...
The stock was trading at $10.80, down from a high of $18 and just off of its May low of $9.60. The July 11 call options were more than $1 when I recommended the trade to subscribers. And they were still $0.80 when I showed this trade to Nancy and Gus.
"You can buy the stock at $10.80 and then sell to someone else the right to buy the shares from you for $11," I told them. "You'll collect $0.80 per share for selling that right. That's better than a 7% return for the next two weeks.
"If the stock is trading above $11 on July expiration day, you'll keep the entire option premium plus collect an extra $0.20 per share in capital gains for selling the shares. If the stock closes the day below $11 per share, you'll keep the entire premium and get to sell another series of options against your shares."
As it turned out, the stock closed at $10.70 on option-expiration day. The July covered calls expired worthless, and we were able to sell August calls for $0.50. Nancy and Gus pocketed 7% for just two weeks in July. And they collected another 4.6% for the month of August.
When the August options expire, we'll sell another series for September... and then October... and so on.
Selling covered calls against beaten-down value stocks is a terrific way to generate excess income in a low-interest-rate environment. And it's one of the best, sure-fire ways to profit in a bear market.
It's certainly better than a freezer full of cash.
Best regards and good trading,
Jeff Clark
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