I Found Your Income!

January 3, 2013 I Found Your Income!

I Found Your Income!

By Costas Bocelli - Creator: Channel Trading Secrets

Last month’s live cyber event, “Charting the Year Ahead”, was so successful that we followed it up with an encore presentation the very next week.

Not only did our After Hours Crew offer their most prescient opinions and forecasts for the New Year, but we also had the opportunity to address many of your pressing financial questions.

And boy... were there ever a lot of questions.  With over 1,000 loyal Tycoon Report readers engaged in the events, we tried to cover as many as we could, and our apologies if we couldn’t get to yours.

But today, I wanted to address a question that’s of great concern among many investors looking to generate income.  This is what a cyber event participant wrote in:

“Help! We need some income... Where is it hiding?” -- Lois C.

And she’s far from the only one who's having this difficulty.  With the Fed’s pledge to keep interest rates and long term bond yields artificially low for years to come, it’s nearly impossible to find steady streams of income and a respectable rate of return from the traditional fixed income markets.

So we’re going to answer Lois’ question and offer her and YOU a game plan to generating higher yielding income in an ultra-low interest rate environment that’s likely going to be the norm for the foreseeable future.  And, I’ll even share an actionable example that can offer you a double-digit annualized return on your investment.

It’s Hiding Right Here!

Practically every fixed income class such as treasuries, corporate bonds and municipal bonds are priced sky high to the moon.  They not only offer paltry yields, but now pose an even greater risk to your principal than one would otherwise think, especially on longer dated maturities.

It may sound a little counter intuitive, but the new normal for investors focused on generating income is finding opportunities in the stock market, and when you couple a simple options strategy to your investment, you can generate a robust income stream.

Now more than ever, companies are attracting income investors to their equity shares as many distribute consistent dividend payments that produce yields far exceeding traditional fixed income products.

But the key to this approach is to first focus on the right stocks that are conducive to your income generating investment objective.  In other words, you want to focus on stocks that possess very strong fundamental traits.  

What I particularly look for are companies that have proven business models and produce consistent profits.  Companies that bring in lots of cash and have strong balance sheets fit this profile.

Next, we want to narrow our search down to find those companies that are indeed generous with that cash.  What I mean by this is that we want to find stocks that deliver a consistent dividend distribution with a competitive yield.  And it’s a plus if we can find the stock at an attractive valuation.

That’s the starting point.  The idea is to buy a stock that essentially acts like an investment grade bond -- boring, not very volatile and dull... but offering an attractive dividend yield.  You want to think of buying into the stock as if it’s your principal investment in a fixed income security.

But the dividend income is still not enough if you are truly looking for a robust income stream.

And that’s where the simple option strategy comes into play.  The next step involves selling Call options against the shares of stock that you buy.  This is commonly referred to as a covered call strategy and, if used properly, it can significantly enhance your income generation.

You’ll want to sell 1 Call contract for every 100 shares of stock that you purchase.  And by selling the Call, you’ll get to collect and keep the income generating premium.  The opportunity cost by using this strategy is that it will limit your upside appreciation on potential stock price gains.  But that’s okay, because our primary objective is to generate income, and we achieve this by collecting dividend distributions and option premiums.

If you can do this over and over and be somewhat consistent, you can easily generate annualized income streams well in excess of a 10% return on your money.

Here are two helpful tips to make sure you are focusing on the proper Call options to sell against your stock:

First, you’ll want to focus on Call options that are relatively near-dated to expiration.  Depending on how active you want to be with your investments, look to sell Call options for income generation that expire 21-90 days out.  90 days is my general limit, which tends to perform like an additional quarterly dividend distribution.

Second, you’ll want to focus on the proper strike price.  Option premiums are usually at their richest around the current price of the stock and the best ones to sell, so you want to focus on the at-the-money strike price or a slightly out-of-the money strike price.  The farther you go out in time towards the 90-day boundary, you’ll usually find the slightly out-of-the-money premiums offer a good balance between premium collection and the allowance for some upside capital appreciation.

Okay, now let’s put our income generation plan into action.

Take a look at Intel Corporation (symbol:  INTC).  The company manufacturers chip sets and microprocessors for a variety of computer and communication technologies.  It’s a blue chip tech titan with a strong balance sheet that distributes a quarterly dividend that yields just over 4% annually.  It’s also trading at a deep discount to the S&P 500, sporting a price/earnings multiple of 10.

It’s a low volatility stock and usually trades like a snail, which fits into our income generating profile.  The stock has also pulled back towards the lower end of its trading range, which is another plus.

With INTC trading at 21.38, for every 100 shares of stock that you buy, you could consider selling the INTC March 22 Calls for 0.52.

The Calls expire in 73 days and, from the premium collected, that’s an annualized return of 12%. (Not including the 0.62 of potential price appreciation should INTC trade above 22 at expiration.)

Throw in the 4.2% dividend yield, and your income generating yield is over 16% annualized.

The goal is to continuously keep your money vested, rotating in and out of stocks like this while utilizing the covered call strategy to enhance your returns.  And that’s the hidden key to unlocking the income you are seeking.

Good luck to you Lois C., and I hope this helps!

P.S. -- If you missed Chris Rowe's email from yesterday, he's looking for input from our readers concerning the best time to schedule his upcoming webinar series.  You're not going to want to miss these free presentations, and if you want to make sure they're held at a time that's convenient for you, click here to let Chris know what times work best for you.

Costas Bocelli Editor, The Tycoon Report Chief Investment Officer, Profit Skimmer Costas began his trading career in 1998, at Gateway Partners, an Equity Options Trading Specialist Unit on the Philadelphia Stock Exchange (PHLX). During his successful tenure, and though unprecedentedly volatile trading levels, Costas boldly and adroitly navigated the global "financial meltdown" that saw the downfall of the hedge fund and of Long Term Capital, and the Russian Currency Crisis. Having achieved the coveted Senior Equity Options Market Maker position for his firm, Costas eventually left to join a proprietary trading desk, where he successfully makes markets for large customer and institutional orders. In addition to his more than 7 years of experience as an options market maker, Costas has also trained and educated many junior traders on option theory, risk analysis, and strategy. His passion is helping self-directed investors achieve all of their financial goals through a clear, practical understanding of the power of options and of the many benefits of   trading in a proven systematic way.

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