Monday I talked to you about taking action.
I explained that the thing that separates successful traders from “wannabees” is the simple act of taking action.
I pointed to this video from back in March where I shared 3 stocks that I believed were perfect for generating income.
Today I want to show you how different life could be for anyone who took action and started generating income with one of those stocks.
One of my favorite methods of generating income is with covered calls.
When you use the covered call strategy, you first need to buy the stock in chunks of 100 shares.
You then sell calls, giving other traders the right to take the stock from you at a certain price.
If you need a refresher, read this article where I talk more in depth about using covered calls.
Round 1
I shared the video with the 3 stocks on March 14th, so let’s say you decided to take action the next day.
On March 15th, AVGO was trading around 1250.07. You buy 100 shares at 1250.07 per share.
My standard advice for selling covered calls is to sell calls 7-10% out of the money and and 30-45 days till expiration.
Let’s say we pick the April 19 1340 call. We’ll pick up $25.10 for selling the option.
Since each option controls 100 shares, we multiply that by 100, meaning we instantly collect $2510 cash.
That instantly lowers our cost basis to $1224.97.
Now we walk away and live our lives. No need to sit at the PC staring at the screen.
We’ll come back on April 19th to see what happened.
Round 2
By market close on April 19, AVGO had dropped to around 1204, so the options we sold expire worthless. (remember we sold a 1340 strike price call)
That means we keep all the cash that we collected and we keep the shares of AVGO.
The following Monday, AVGO is up — it’s trading around $1227.
We decide to sell the May 31 1340 call for $20.25, instantly collecting $2025.
We also lower our cost basis again: $1224.97 – $20.25 = $1204.72
Again, we walk away until the expiration date.
Round 3
When the market closes on May 31st, AVGO is trading at 1330.50.
Again, since AVGO did not hit the 1340 strike price we sold, we keep the full premium that we collected by selling the last covered call, plus we keep the shares.
The following Monday, on June 3 AVGO is trading at 1342.24.
We sell the July 19 1470 call for $28.30, instantly collecting $2830.
This helps us continue lowering our cost basis: $1204.72 – $28.30 = $1176.42.
Then we walk away for 6 weeks, wait to see what happens.
Called Away
Finally on June 11th, AVGO rockets up past our 1470 strike price.
That means that anytime after June 11, we could have our shares called away from us.
Some people look at that as a bad thing. But it’s only bad if you’re doing covered calls wrong.
Because one of my rules of thumb is to never sell a strike price below my cost basis.
That simple rule makes it very hard to lose money using this strategy.
One thing that might surprise you is that your shares usually don’t get called away immediately when the stock price goes above the strike price. Sometimes it can take a few days, other times it can take all the way till expiration day.
Whatever the case is, let’s do the math to figure out how profitable this trade would have been.
Our last cost basis after selling the final covered call was $1176.42.
And we sold, or got called away, at $1470.
To figure out the gain, we divide the sell price by our cost basis: $1470 / $1176.42 = 1.2495
This means we achieved a 24.95% gain.
In simpler terms, for every dollar we invested, we got back approximately $1.25. Not bad for a few months’ work, right?
And the best part… We didn’t have to watch the market daily. We just set our trades and let them work for us.
So, if you took action back in March, congratulations! If not, now you see the potential of using covered calls to generate consistent cash flow.
Later this week I’ll show you how we could have used this same exact stock during this same exact timeframe with a different strategy to generate income in another way.
Because covered calls are great, but to get started with AVGO when it was $1250 per share would mean you’d have to have $125,000 to start with.
Not everyone has that kind of capital — and that’s why it’s important to know a variety of strategies to be able to trade the same setup.
UPDATE: That article is now available here.
Trade well,
Jack Carter
P.S. Are you wondering how I spotted a hot stock like AVGO all the way back in March? It’s all based on trends. And this secret weapon helps me find trends with minimal effort.
