Global markets have let out a sigh of relief: There was a clear winner after a free and fair election. Now all of the funny business is over, but cooler heads are prevailing.
A couple of weeks ago, I wanted to do something to help my readers brace for potential volatility. With the election coming up, it seemed like uncertainty could spin the markets…
I am always bullish on the American economy, even when things are volatile; where there’s volatility, there’s opportunity.
Turns out, the volatility hasn’t really hit. But, it could come at any time.
My readers were able to collect 8.2% (and 16.4% on margin – which means the brokerage paid for half) in the matter of two weeks on AAPL covered calls. It’s a strategy that prevails whether you need a cushion for volatility or just taking advantage of a booming market.
The Strategy That Netted 16.4%
Conventional wisdom says that when a stock splits, the price will go up. The assumption is that because of the lower share price, more investors will buy, thus driving the share price higher.
So when Apple (Nasdaq: AAPL) split at the end of August, many were expecting the price to go a lot higher. It didn’t…
AAPL
That’s a chart I pulled directly from my Trend Point Software. As you can see the value of AAPL dropped right at the beginning of September. Since then, it’s pretty much gone sideways.
One explanation is that brokerages these days allow traders to buy “splices” of stocks. They don’t have to put up $120 for a share of AAPL. They can buy these splices or “micro” shares for as little as $5.
This means that stock splitting is not as big of an event as it used to be. Nor is the release of the latest iPhone.
Regardless, Apple is still a blue chip company that will continue to grow. It’s why I felt good recommending this income strategy to my readers – including those who maybe already owned AAPL stock and wanted to lower their cost basis.
Our Covered Call Opportunity
A covered call basically allows you to make money selling call options on a stock you own. It’s a great strategy for blue chip companies like Apple: a good, stable company that isn’t likely to lose a lot of value overnight.
The seller makes a profit as soon as they sell the contract for a covered call. If the stock hits the strike price on the covered call contract, the buyer has the right to exercise the option to “call” the stock away from the owner – thus offering additional upside to the seller.
Those who followed my recommendation on AAPL could have made 14.8% within a couple of weeks…
First, they would have had to buy 100 shares of AAPL. In doing so they were “covered” should a buyer call away their shares at a strike price. Let’s say they got their 100 shares for $115, which is about where it’s been trading.
Then, they’d pick an options contract with a strike price that’s higher than the price of where they bought it. That’s the price they agree to have the stock called away from them if the stock hit that price before the option expired.
In this case, we were looking at options expiring December 11. Let’s say just for an example we sold the $120 strike price. We got $4.50 per contract, so at 100 shares, that’s $450 we make right off the bat.
AAPL did in fact hit the strike price of $120. Shares would be called away at that point, and we’d earn an additional $5 per share (based on the cost basis of $115). With 100 shares, that’s an additional $500, for a total of $950.
Based on the initial spend, that’s 8.2% (or 16.4% on margin) – in the matter of two weeks.
A Proven (and Less Risky) Repeatable Strategy
Like I said – this is a great strategy for creating income for the rest of your life. And it’s less risky than trading the underlying stocks (according to the SEC).
Whether you’re taking advantage of a bull market or hedging against some volatility, it’s a great, repeatable strategy to know.
Looking forward to taking a look at the post-election markets later this week. There’s $1.3 trillion in dry powder.
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