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.