Make money so you don’t lose money. No, this is not a quote from Yogi Berra! It’s me, Alan, speaking and I make no apologies for this seemingly sophomoric statement. On April 12, 2008, I wrote an article wherein I described a negative cash flow property I own in Florida. I was losing $800 per month until I took action. See the article below if you haven’t already read it. Here is how I converted that $800 per month loss into a breakeven scenario utilizing the strategy of selling stock options:
I opened a brokerage account for the specific purpose of offsetting my real estate losses and put $27,000 into the account. This amount was based on the fact that I projected a 3% per month return on my money. I am writing this article to show a real life example of how I accomplished my goal this month. I copy and pasted the section of my brokerage account statement that pertains to this months transactions. Please follow the circled numbers:
1- I purchased 400 shares of Steel Dynamics (STLD) @ $36 per share for a total cost of $$14,406.75 after commisssions (so small, commissions are a non-event).
2- I sold 4 contracts of the May $35 call options (in-the-money strike price).
3- This generated $951.02 cash into my account in seconds!
4- I purchased 100 shares of Weatherford (WFT) @ $80.71 per share for a total cost of $8076.65 after commission.
5- I sold 1 contract of the May $80 call option (slightly in-the-money strike).
6- This generated $353.29 into my account, once again, in seconds.
7- The total premiums collected were $1303.
8- Since I sold in-the-money strikes, I will more than likely lose money on the sale of the stocks. I will deduct this amount. I bought STLD @ $36 and agree to sell for $35. The loss is $1 per share times 400 shares or $400. WFT was purchased for $80.71 and will be sold for $80 or a loss of $71 for the 100 shares. Total loss on the sale of the stock is $471. Deduct this amount from the $1303 and that gives us a final profit of $832, meeting my $800 target. This, by the way, represents a 3.7%, 3-week return (3 weeks until these options expire)!
9- Here is the check I wrote to my real estate corporation seconds after generating this profit into my brokerage account.
Now, is it that simple and easy and guaranteed? The answer is no, not yet anyway. You must learn and firmly nail down all the principles involved in selling stock options. For example, if the values of STLD and WFT decline below the strike prices, your profits will be affected. This is where you need to be prepared with your exit strategies. I devoted an entire chapter of my book, Cashing in on Covered Calls, on this very topic (see chapter 11). Also, in my workbook, pages 53 to 73 is replete with real life examples on how to invoke exit strategies. Although there is some risk in this system, it is considered so safe, that the government allows you to employ it in your self-directed IRA accounts!
Don’t be afraid of the stock market…it is NOT rocket science. We may have been brainwashed into thinking that we are not capable but that can’t be further from the truth. Blue Collar Investors like you and me are smart enough, motivated enough, and just as capable as those Wall Street Insiders.
Wishing you all the best in investing.
***** Best 1-week performers: Hit the “comments” link of this article to see 5 of the top performing industries and some of the best stocks within those industries for the week ending 4/25/08.