How to Generate 129% Annualized Returns on Stocks You Already Own
It was another perfect month for Income Trader’s Amber Hestla.
In November, four more put options Amber recommended selling for her Income Trader portfolio expired worthless, which means her subscribers kept the premium they collected from selling the option as pure profit. These victories are just the most recent of her 33 consecutive profitable closed trades.
If you’re a regular reader, you’re likely familiar with Amber’s put selling strategy. In short, it involves collecting investment income by selling put options on stocks she thinks are undervalued. These Instant Income checks, as she calls them, usually range anywhere from $100 to $150 to even $200.
Most of the time — 94% in Amber’s experience — the option expires worthless, and the money she collects is hers to keep as pure profit.
But if you read the above paragraphs closely, you’ll notice I said all of Amber’s Income Trader picks have been profitable. So if 94% of the puts she’s recommended have expired worthless, what happened to the other 6%?
To answer the question, we first need to recap how options work.
A put option gives investors the right, but not the obligation, to sell a stock at a specified price (the strike price) before a specified date. When you sell a put option, you have the obligation to purchase a stock from the put buyer if it falls below the strike price.
For example, on top of the four put option contracts that expired worthless in Amber’s portfolio this month, there was one position left over from October when shares had been assigned. Specifically, the puts sold in August on Green Mountain Coffee Roasters (NASDAQ: GMCR) expired with the stock below the strike price. As a result, 100 shares of GMCR were assigned for $67.50 per share for every contract sold.
At this point, you’re probably thinking there are only two options: Sell the shares immediately or wait for them to rebound and sell them at a later date.
But unbeknownst to most, there’s actually a third, more lucrative option that leveraged the newly purchased shares of GMCR, allowing Amber to reap big instant “dividends.”
I’m talking about selling covered call options.
A call option is exactly the opposite of a put option. It gives the buyer the right — but not the obligation — to buy a stock from the call seller if it rises above a specified price before a specified date. When the seller already owns shares of the stock they’re selling the call on, the option is considered “covered.”
By selling covered calls on the assigned GMCR shares, Amber’s readers were able to collect $514 in Instant Income. And the shares were called away last week after GMCR moved up on better-than-expected earnings, making this Amber’s 33rd consecutive win.
The only other time Amber’s readers have been assigned shares of a stock was in April, when the $55 puts she recommended selling on mining equipment maker Joy Global (NYSE: JOY) expired in the money. As a result, 100 shares of JOY were assigned for $55 per share the day the option expired.
In order to take advantage of this opportunity, Amber recommended selling the $55 covered calls on JOY that expired the next month. As she told her Income Trader subscribers at the time:
“To generate immediate income, I recommend selling the JOY May 55 Calls for $1.90 – $2.10. Selling this call will generate $200 in immediate income if you enter at the middle of the range.
“If JOY is trading above the $55 strike price when the call expires at the close on May 17, we’ll be obligated to sell 100 shares of JOY at $55 per for each contract sold.”
She went on to say:
“There are two possible outcomes to this trade.
“[Either] JOY is trading above $55 at expiration, and the call gets exercised and the shares sold, [or] JOY is trading below $55 at expiration and we continue to own the stock and have an opportunity to sell another call at that time.”
As it turns out, Amber’s assessment was spot on. On May 17 — the day the option expired — shares of JOY were trading near $57, slightly above the call’s $55 strike price.
As a result, the shares were immediately sold at expiration and the trade was closed. The position was only open for 26 days, but it gave Amber’s subscribers a 5.6% return on investment — or an annualized gain of 129%.
That’s one reason being assigned shares from a put option is not necessarily a bad thing. Every time you get put shares of a stock, you have the potential to earn even more income by selling a covered call option.
But selling covered calls isn’t limited to options traders like Amber either.
One of the best parts about this strategy is that it requires little work on the seller’s part. All you need is a brokerage account and at least 100 shares of the underlying stock to get started. As a result, just about anyone can sell covered calls to boost their investment returns.
What’s more, since you actually own the stock until the option is in the money, you’ll get to benefit from dividends and other payments that your holdings pay out over time, too.
If today’s market environment has you starved for income, consider employing an options selling strategy like the one Amber uses in her premium newsletter, Income Trader. From our experience, selling options on high-quality stocks is one of the best ways to generate extra income.
Note: As we said earlier, November marks another perfect month for Amber’s Income Trader portfolio. Not only did she close her 33rd (out of 33) profitable trade, but she was able to generate an additional $514 in income by selling covered calls on GMCR. To learn more about Amber’s options selling strategy and to see her track record, follow this link.