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Finding dependable, double-digit yields in this market isn't easy...
The Federal Reserve has pushed interest rates to all-time lows. Bonds are barely beating inflation, and the yields on dividend stocks are awful -- the S&P 500 only pays less than 2%.
To make matters worse, stocks are within pennies of their all-time highs. So even if you are lucky enough to find a company with a decent payout, chances are you'll be taking on a lot of risk.
But that doesn't mean income investors have to throw in the towel. There are plenty of ways to earn dependable high-yields in this market -- you just have to get creative.
For example, Profitable Trading's Amber Hestla has been using covered calls to earn an average annual yield of 75% in her Maximum Income portfolio since she launched her service in January.
I know what you're thinking. You probably saw the words covered calls and 75% annual yields and thought, "Damn, there must be a lot of risk involved with this strategy, right?"
In fact, using covered calls is arguably the safest -- if not the only -- way to meaningfully boost your income stream in today's market. It's a strategy I'd even recommend to my grandma.
When you sell covered calls, you're essentially getting paid up front to sell shares of a stock at a higher price. As long as you already own the shares you're selling the calls on, you're taking absolutely zero downside risk compared to buy-and-hold investing.
Let me show you an example using one of Amber's trades.
Earlier this year, Amber recommended her Maximum Income subscribers sell covered calls on MasterCard (NYSE: MA). Amber liked the stock because of its strong competitive advantages and dominant market share.
As a result, Amber added shares of MasterCard to her Maximum Income portfolio on Feb. 7. Since the stock was trading around $75 at the time, the purchase came out to about $7,500 per hundred shares. You must own or purchase 100 shares for every call option contract you sell. That's why it's "covered."
And here's where it gets interesting. When she added shares, she also sold March 78 calls on them. For those who don't know option nomenclature, the "March" label represents the month in which the call expires, while the "78" indicates the strike price (the price at which the stock must be trading at in order for the call to get exercised). Since the calls were trading for $1.10 around that time, she received approximately $110 per contract for making the trade.
After that, two things could have happened. If MasterCard was trading below $78 when the option expired, then Amber would have done nothing. If MasterCard was trading above $78, she would have sold her 100 shares for $78 a piece -- or $3 more than what she paid for them.
Either way Amber gets to keep the $110 she received from selling the calls. This money is called the option premium, and it's the reward investors get for opening the trade in the first place.
When the option actually expired, MasterCard was trading at $75.99 a share -- a couple dollars below Amber's strike price. As a result, she kept the shares of MasterCard, and the option premium, all for doing nothing more than opening her brokerage account and executing the trade.
Remember, this all happened over the course of six weeks. So as long as the shares you're selling the options on don't get called away, this process can be repeated up to eight or nine times annually.
That means Amber could potentially generate $1,000 in additional income from MA every year using this strategy. Considering she only paid $7,500 for the shares to begin with, that translates to a 13.3% annual yield.
And that's from a blue-chip stock like MasterCard.
The yields get even higher if you're willing to travel off the beaten path a bit. For example, Amber recently told her subscribers about a covered call trade on International Game Technology (NYSE: IGT) that generated a 136% annual yield. While these trades are rare, they're definitely possible using this strategy.
The best part about using covered calls is that you retain all the privileges of being a shareholder in the company. You'll still get the dividends, the return of capital payments, the right to vote at shareholder meetings, etc.
The only thing you lose is some of the upside potential. But as long as you're setting the strike price for your calls above your purchase price, then you can still book sizeable capital gains on your position.
In other words, using covered calls is a lot like setting a target selling price for your stocks. The only difference is that you're getting paid for it.
Of course, there's always the chance that the stock you're selling calls on goes down in price. If that's the case, then selling covered calls can actually help you. Remember, you already own shares of the stock to begin with. So if those shares fall, then either way you're going to take the capital hit. But for covered call sellers, some of that loss can be offset by the premium received.
What's more, you can personally start taking advantage of this opportunity today. You don't need to own MasterCard, International Game Technology, or any of the other stocks we recommend. As long you own 100 shares of any stock, you can make covered calls work for you.
That's the beauty of covered calls. It's literally the easiest way we can think of to generate consistent income in this market -- or any market for that matter. It's practically a no-brainer. In fact, Amber recently compared it to collecting rent on an investment property. Rather than letting your stocks just sit there, you can "rent" them out to other investors. Click here if you'd like to learn more about this simple process.
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