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How to Make 100% Per YearBy Jeff ClarkThursday, December 4, 2008 I met "Gus the Loan Shark" at a Christmas party in 1999.
Gus didn't look anything like the typical Hollywood version of a loan shark. He was mild mannered, young (just about my age, actually), in good shape, and conservatively dressed. And he had no interest whatsoever in the stock market.
"Why should I buy stocks," Gus said, "when I can make 100% per year lending money?"
Of course, this was during a time when stocks were racing to the moon. Everyone was bullish and willing to put their entire life savings into this.com and that.com. Gus shared my skepticism about how it would all end.
"But," I asked, "what about the risks lending money to folks on the lowest rung of the income ladder?"
Gus laughed. "It's amazing," he said. "We loan money to people who are temporarily down and out. We charge 2% per week. And we insist that they pay at least that 2%. We have very few defaults."
"I've never had to resort to violence," Gus continued, "and nearly everyone eventually pays their debt. Of course, some people run away from the situation. But the return on the rest of the loans more than offsets the risks."
Indeed, loan sharking is a great business. But right now, there's a better business that can return 2% per week... and doesn't involve the potential breaking of limbs. It's covered call writing.
Selling covered calls has always been a terrific way for investors to generate income on a conservative portfolio of stocks. The strategy basically involves buying a low-risk value stock at a bargain price and then selling to someone else the right to buy the stock at a higher price.
And right now, with stocks so beaten down and option prices so expensive, you can lock in better returns than a loan shark.
For example, shares of Microsoft (MSFT) closed yesterday at $19.87. That's as cheap as the stock has been in the past six years. Investors can buy MSFT at $19.87, give someone else the right to buy it for $20 in January, and pocket $1.60 right away. That's an 8% immediate return for a six-week long trade.
Shares of Intel (INTC) offer similar potential. Investors can buy INTC for $13.60 and sell the January 14 call for $1.10. That's another 8% return in just six weeks. And if Intel is trading below $14 when the options expire in January, traders can sell the March or April options and capture even more premium.
These aren't even the best trades available. I just told my Advanced Income subscribers about a 120-year-old company, trading at less than five times earnings and paying a 7% dividend. Selling covered calls on this stock will generate a 13% return over the next six weeks.
That's better than the return Gus gets on his loans. And you don't have to break any thumbs.
Best regards and good trading,
Jeff Clark
Further Reading:
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