Steady income strategy

[wooish]

I want to hear from you guys what strategy to use on your IRA or your long term account for steady income. Let say you have $32000 in your account and you want steady income every month. So the obvious strategy is to buy stocks with dividend and reinvest the dividend. Is everyone else use different strategy?

Here's what I'm seeing might provide some good income on a monthly basis

1. Pick a good stock like ISRG closing @ $316/share (rounded off for easy calculation) and buy 100 shares total price is $31600.
2. Sell 1 contract of June $320 for $12 total credit is $1200.

So if the PPS by June expiration is less then $320, you get to keep $1200 full credit. If PPS exceeds $320, you get to keep $1200 + $400 (if someone decides to buy your shares @ $320) = $1600. Rinse and repeat above for the next month, if you do this for 1 year, you get to keep at least $14400 ($1200x12)

Using the above strategy, it assumes that you hold your shares in your account and you don't care whether the pps drops or rise. The higher the pps the higher the premium you collect each month. Does my math make sense or am I been smoking? over 45% in premium by letting the $$$ sit in the account for 1 year?

EDIT: This strategy would probably work in stagnant or bull market, otherwise adjustment will need to be made

[skiracer]

I want to hear from you guys what strategy to use on your IRA or your long term account for steady income. Let say you have $32000 in your account and you want steady income every month. So the obvious strategy is to buy stocks with dividend and reinvest the dividend. Is everyone else use different strategy?

Here's what I'm seeing might provide some good income on a monthly basis

1. Pick a good stock like ISRG closing @ $316/share (rounded off for easy calculation) and buy 100 shares total price is $31600.
2. Sell 1 contract of June $320 for $12 total credit is $1200.

So if the PPS by June expiration is less then $320, you get to keep $1200 full credit. If PPS exceeds $320, you get to keep $1200 + $400 (if someone decides to buy your shares @ $320) = $1600. Rinse and repeat above for the next month, if you do this for 1 year, you get to keep at least $14400 ($1200x12)

Using the above strategy, it assumes that you hold your shares in your account and you don't care whether the pps drops or rise. The higher the pps the higher the premium you collect each month. Does my math make sense or am I been smoking? over 45% in premium by letting the $$$ sit in the account for 1 year?

EDIT: This strategy would probably work in stagnant or bull market, otherwise adjustment will need to be made

wooish, i like the sound of what you have here. in all the years i have been trading i have never sold a call. i've bought hundreds of calls and puts but have never sold a call or put in a situation as you have suggested. but what you have said here seems to hold water and really seems to simple to to be true. i own a pile of NJR and that is just sitting there earning dividends. i could sell calls on as much of that as i want, is that right? i am almost embarrassed to state that i have never had any experience selling a call or put but not that embarrassed to want to understand the play or to make the money if it is that simple.

[dmk112]

It's a boring, but good strategy. You tie up your entire port and the profit potential is limited to $1600. If the stock surges during that time you miss out on the additional gains. I would recommend this more in a low volatility environment, unlike current market conditions with the Vix spiking as such. Maybe choose a stock that has a smaller beta?

[mrmarket]

How about a stock like Intel, with a 3% dividend and a ridiculously low PE of 19?

Or Pfizer with a 5% dividend and a PE of 14?.

[dmk112]

Also - ISRG has no dividend (per yahoo)... how about a stock like Verizon? Almost 7% divy and then you can sell calls on top of that.

[wooish]

Yes this strategy is boring but it makes consistent income which is what a long term account is all about. In Ski's case, instead of letting a bunch of NJR sitting in your account why not putting them to work. Sell some out of the money calls and choose your strike price wisely should you not want your shares to be called away, preferbably with less than 60 days expiration so the time decay is in your favor.

In this strategy, I think low volitility stock will definately help because you want the option expired worthless but on the other hand you still makes money in case your stocks get called away. Anyway, even if your stocks get called away, buy them again with your profit and start over again.

[wooish]

Also - ISRG has no dividend (per yahoo)... how about a stock like Verizon? Almost 7% divy and then you can sell calls on top of that.

I was just using ISRG as an example so any good stock would do. Yes the key is to find stock with dividend and lots of option activity so you can earn double money (dividend and premimum)

[dmk112]

site i found for covered call plays.... www.callpix.com

[wooish]

Ski

I looked up NJR and sorry to say that NJR doesn't have much options activity so it's not a good stock to sell covered call. If you happen to hold stocks in the future, selling covered call is a good way to make additional $$$ on top of dividend.

[steelman]

Wooish,

It's a great strategy. Actually, that is the next section in my options course. A lot of people do it, especially people looking to generate income and not concerned with growth and appreciation. I do remember one of the instructors saying that he had only been called out of his stock a few times. When I get a little more of the grasp of selling calls and puts I am sure I will use that within my IRA. Thanks for the tip.

[dmk112]

What's the best time period to buy covered calls? Is it the next month out? 2 months?

[wooish]

dmk

It's different depending on situations. I've read that day traders usually trade options on that same month. In general you want to buy options at least 2 months out so you have enough time for the stock price to advance. When buying options, time decay is your enemy and the option loses value fast with less than 30 days of expirations.

[dmk112]

dmk

It's different depending on situations. I've read that day traders usually trade options on that same month. In general you want to buy options at least 2 months out so you have enough time for the stock price to advance. When buying options, time decay is your enemy and the option loses value fast with less than 30 days of expirations.

Sorry... I meant WRITE covered calls...

[wooish]

Best to sell covered calls is preferably 30 days or less because since you're selling the calls time decay is your best friend. However covered calls with less time has less premium. So you have to choose what you're comfortable with.

[Karel]

[...]

In this strategy, I think low volitility stock will definately help because you want the option expired worthless but on the other hand you still makes money in case your stocks get called away. Anyway, even if your stocks get called away, buy them again with your profit and start over again.
I think I see a problem when the stock gets called away. You may have to buy back at a price that will eat into your profits. This will at least lower the average return. Another possible problem might be loss of capital when dividend stocks get out of favor. This could also influence the possibilities of writing reasonably well earning covered calls.

Just some remarks of someone who is not an options expert at all.

Regards,

Karel

[dmk112]

I think I see a problem when the stock gets called away. You may have to buy back at a price that will eat into your profits. This will at least lower the average return. Another possible problem might be loss of capital when dividend stocks get out of favor. This could also influence the possibilities of writing reasonably well earning covered calls.

Just some remarks of someone who is not an options expert at all.

Regards,

Karel

Karel.. yea, this is for stocks that you think will slightly go up or stay steady.... you don't want to do it for growth stocks that may ripp up. But blue chips that have been in the same place for years... e.g. VZ, JNJ, etc.... it's a viable strategy.

[riverbabe]

Karel.. yea, this is for stocks that you think will slightly go up or stay steady.... you don't want to do it for growth stocks that may ripp up. But blue chips that have been in the same place for years... e.g. VZ, JNJ, etc.... it's a viable strategy.

JNJ might not be the place now! Big recall! Possible criminal charges! Ouch

[dmk112]

JNJ might not be the place now! Big recall! Possible criminal charges! Ouch

JNJ will be ok... this is nothing than a blip in their business. The consumer business is less than a 1/3 of their business.

[wooish]

Just came across this nice article about finding Low Beta, High quality dividend stocks http://dividendsvalue.com/6520/11-low-beta-high-quality-dividend-stocks/

[Peter Hansen]

The buy and hold investor can do no better than with these 2 stocks . One Tobacco , MO and the Other a REIT O .

Why do I say this? Look at the links below and see the sweet monthly dividends form O and the quarterly dividends from MO, and note how 10K increases for both of them. I have both in my daughter's Roth Ira Account!


For O http://quicktake.morningstar.com/StockNet/StockReturns.aspx?symbol=O

For MO http://quicktake.morningstar.com/StockNet/StockReturns.aspx?symbol=MO

Perhaps others can add similar stocks with comparable performance!