My colleague at StreetAuthority, Paul Tracy, has been finding low-risk and profitable investments for over a decade. Lately, he has become concerned about the risks of the stock market over the long term and believes “dividends will account for ALL of the market’s return for the next decade.”
If he is correct, and the arguments he makes to support this conclusion are very strong, most investors will face disappointments for years to come. The best long-term strategy is to buy high-quality value stocks that have sustainable, growing earnings and pay a safe dividend.
I agree with Paul’s long-term views, but I rarely buy these kinds of stocks outright. #-ad_banner-#
You see, I use a special strategy that allows me to buy high-quality stocks at a discount and even earn extra income from stocks I own. It’s not for everyone, but I think it’s one of the smartest, highest-percentage strategies in the financial world.
I’m not going to beat around the bush. It involves options. But hear me out, the strategies I use are safer and simpler than you might imagine.
For example, with one option strategy I use, one of two things can happen:
1. You receive instant income and keep it as pure profit — without ever having to buy a stock.
2. You get the opportunity to buy shares of a company you want to own anyway — just at a discounted price. You’ll even know the price up front before you ever make the trade.
You’re basically betting that a great company won’t fall to fire-sale prices in a short period of time. We’ll be right in most cases and book the income as 100% profit. It puts you in control of when (and how much) income is deposited into your account, even if the market is flat for the next decade… or century for that matter.
Let’s look at an example using one of my favorite stocks…
Phillips 66 (NYSE: PSX) is the second-largest independent oil refiner in the country. It’s also one of the largest pipeline operators, with 15,000 miles of pipelines responsible for moving oil from fields in remote locations to refineries. It uses its 10,000 service stations throughout the country to deliver gasoline directly to consumers.
PSX is a value stock trading with a price-to-earnings (P/E) ratio of less than 8. Earnings are expected to grow steadily at about 5% a year. The company has more than $4.4 billion in cash and cash flow from operations of more than $5.7 billion a year. PSX seems to have more than enough cash to fund its operations, expand and increase its dividend. For now, the company is using about 12% of its earnings to cover the dividend payments. That’s well below the average payout ratio of about 30%, so PSX could more than double its dividend in the next few years.
Needless to say, this is a company I’m more than comfortable owning. But rather than buying PSX outright, I can sell puts and earn instant income. And if the shares move lower, I’ll get the chance to buy shares at a lower price.
Let’s use the Feb $48 puts at $1.15 as an example. That’s a put that expires in February that pays sellers a $1.15 per-share premium, or $115 per contract. If shares of PSX trade below $48 a share, we’ll be shareholders at a cost basis of $46.85 a share ($48.00 – $1.15, our premium).
The $115 instant income is ours to keep no matter what. If shares stay above $48 during the next five weeks, the options will expire worthless and we won’t buy one share of PSX. Most brokers will require a small margin deposit of about $960 when you make this trade. If the option does expire worthless, we get a 12% return on that deposit…in five weeks.
Here are two major risks in this trade:
– PSX could fall below the $48 strike price. If it does, we may have to buy shares at a price that’s above current market price. We minimized that risk by selling options on undervalued stocks with a strong uptrend.
– The stock price could rise significantly, and we’ll miss out on some of the gains. This does not bother me much because the premium received when we sold the put, $115 per contract, is a solid 12% return for a five-week period, and we’ll have another chance to generate income by selling more puts when the option expires.
In other words, the worst case is buying PSX at $46.85, a 7.6% discount to current prices. We’d own shares at a dirt-cheap P/E of about 7, and we’d generate additional income using covered calls.
This might be the closest thing to a no-lose strategy you’ll find in the markets. This doesn’t mean there’s zero risk or that these strategies are for everyone. In fact, if you have less than $25,000 in your trading account, I don’t recommend you try these kinds of trades.
I’m putting the finishing touches on a report that details who should (and shouldn’t) try these strategies and answers nine other commonly asked questions about boosting income with options. If you’d like learn more about generating income using options, simply click here and tell me where to send the report
. It’s completely free, no strings attached. Editor’s note
: Have you ever used options to boost income? If so, tell me about your experience, good or bad. As always, send feedback to Editorial@ProfitableTrading.com