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USING STOCK OPTIONS TO NEUTRALIZE NEGATIVE CASH FLOW PROPERTIES/ PART III- Evaluating our Investment

This is the third and final article in this trilogy of writings regarding generating income via stock options to erase a negative cash flow situation.

In part I, our strategy was developed. Capital preservation was of utmost importance since we needed to maintain our initial investment to continue to generate our monthly returns. Compounding of profits is NOT part of this particular strategy since we need to access the income immediately. As a result, a decision was made to sell predominently in-the-money strike prices. As always, our system only allows choosing the greatest performing stocks in the greatest performing industries (not rocket science!). I anticipated that a 3% monthly return was achievable, so a $27,000 investment was required.

In part II, I made my selections. STLD is one of the best performing equities in the red-hot steel industry as is WFT in the equally sky-rocketing oil services industry (both common sense decisions). Making these type of Blue Collar determinations are not a guarantee of success but it throws the odds significantly in our favor. I was prepared to initiate an exit strategy if either one or both of these investments didn’t work out the way I anticipated. Let’s review, in general terms, why I had confidence in my decisions:

-These are two of the greatest performing stocks both fundamentally and technically.

– The oil services and steel industries are in the top 3% of all industries. Therefore, we know that the institutional investors are putting money into these sectors. That means we a swimming with the current, not against it!

– Selling in-the-money strike prices gives us downside protection of our option premiums.

– I am prepared to initiate an exit strategy if needed.

Now part III, how’d I do?

In an ideal world, you want the closing price of your stocks to be above the strike prices. If this occurs, the entire option profit is protected. You will recall that the original option sales generated $1303 but we deducted the monies to be lost if we were called out at the strike price. Therefore, the real profit came to $832 for the 1-month period. For WFT the $80 call was sold and the stock closed the contract period @ $88.60. For STLD the $35 call was sold and the equity closed @ $37.92. This means that we did generate $832 pure profit for the 3-week period and preserved every penny of the capital invested. For the next contract period, I will use the very same strategy to generate another $800 ( not necessarily the same stocks) and therefore obliterate the negative cash flow on my Florida property.

For those of you familiar with my system, you may be wondering if I initiated an Expiration Friday exit strategy with one or both of these securities. The question is: will buying back the option and selling another in-the-money strike (next contract period) generate the type of return needed for this situation. The answer is yes but I’ll leave it to you to figure out which one (or both) I used.

My goal for each and every one of you is to invest with the same confidence and success as me. Learn the system, paper trade for a few months and now you have years and decades to benefit.

You can do this…failure in NOT an option (no pun intended!).

Wishing you the best as you become CEO of your own money,

Alan

ps: Check the comments link for this past weeks best performing industries and their top stocks.

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About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

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5 Responses to “USING STOCK OPTIONS TO NEUTRALIZE NEGATIVE CASH FLOW PROPERTIES/ PART III- Evaluating our Investment”

  1. admin May 17, 2008 11:26 am #

    Here are some of the top performing industries (and some of their best stocks) for the 1-week period ending May 16, 2008:

    CONSTRUCTION/RAW MATERIALS
    txi
    cx
    mlm

    GOLD/SILVER
    bvn
    gg
    auy

    OIL and GAS/INTEGRATED
    hes
    cvx
    tot

    OIL and GAS EXPLORATION/PRODUCTION
    gmxr
    hk
    clr

    METAL MINING
    RIO
    fcx
    rtp

    STEEL
    mtl
    ggb
    stld
    nue
    sid
    mt

    As always, use this information in conjunction with all other system requirements before making your investment decisions.

    Alan

  2. Russ B June 4, 2008 8:20 am #

    I just became aware of your blog and materials through your very informative Learning Annex seminar. I have a question regarding selling ‘in the money’ calls. Assuming you open a buy/write position using ITM calls with 4 weeks until expiration, at what point in time would a calling away of the stock actually occur? Would it be immediately or closer to expiration… or maybe not at all?

  3. admin June 4, 2008 12:03 pm #

    Russ,
    I’m glad you enjoyed last night’s teleseminar/webinar. You ask a great question!
    Assuming that the price of the stock remains above the strike price, your shares are normally assigned on the Saturday after Expiration Friday. Since we are selling America Style Options (se pages 39, 111, and 273 of my book, Cashing in on Covered calls) there is always the possibility of early assignment, but this is quite rare.

    Of course assignment of your shares can usually be avoided, if you choose, via an expiration Friday Exit strategy(pages 120-127 of my book) and the specific calculations for this specific strategy are computed by the “what now” tab of the ESOC Calulator.

    I have been selling predominently In-the-money strikes during this volatile market and doing quite well with them.
    Best regards,
    Alan

  4. christopher glover September 5, 2009 10:32 am #

    i love it so much thanks for looking out for the little guys.

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