Building Wealth There is a simple way to generate safe, steady income on almost any investment...
This strategy is one of the most powerful financial tools ever created. But it's also one of the most misunderstood. Many folks think it's just too risky...
So before I detail how this tool can help you generate regular income from assets you already own, let's look at a simple housing example...
Most folks think the only way to make money from an investment (like a house) is to either sell it or rent it out...
But what if there were a better way?
Let's say you own a house with a current market value of $200,000.
One day, a guy knocks on your door who thinks your house is really worth $220,000. He tells you he'll buy your house from you for $210,000. But not right now. He says, "If you agree to sell me your house six months from now, I'll pay you $5,000 now and $210,000 in June."
You don't think your house is going to be worth that much in six months. But if this guy is willing to hand you $5,000 cash in return for you agreeing to sell your home for a nice profit, you'll gladly take his offer.
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You say yes, and you both sign the contract. And you get $5,000.
Now, there are three things that can happen...
One possibility is that in the next year, housing prices stay steady. The guy won't want to pay $210,000 for your house if it's still only worth $200,000. So he walks away from the deal, and you get to keep the $5,000 and your house.
Another possible outcome is that housing prices rise and your home is worth $230,000. According to your contract, you must sell your house for $210,000. You keep the upfront $5,000 cash payment, sell your house for a profit, and find a new house.
Or maybe housing prices drop and the value of your house falls to $180,000. Just like if housing prices stayed steady, the buyer won't want to pay $210,000 for a house that's worth less than that... only $180,000 in this case. Again, in this scenario, you'll get to keep your $5,000.
This can get confusing, so let's go over what happens one more time...
You owned a house with a market value of $200,000. You sold someone the right, but not the obligation, to buy your house from you for $210,000 or 5% more than the current value. You received an upfront payment of $5,000 for agreeing to the terms of this contract.
This is exactly how our strategy works: You own something of value, and you sell someone the right to buy it from you.
This is known as covered-call writing.
Call options, or "calls," give the buyer the right, but not the obligation, to buy a particular stock at an agreed-upon price at a set time in the future.
The reason they're called "covered" calls is because we're going to own the stocks we sell calls against.
In my Retirement Trader newsletter, we use this strategy to generate income on some of the world's safest stocks.
For example, last August I recommended that readers sell covered calls on an exchange-traded fund. This fund holds the biggest and best technology companies in the world. Apple (AAPL), Microsoft (MSFT), AT&T (T), IBM (IBM), and Visa (V) all grace the list of its top holdings.
The fund is called the Technology Select Sector SPDR Fund (XLK)... and I recommended that my readers...
Buy 100 shares of XLK for about $40.50, and
Sell, to open, the XLK October $40 calls for about $1.50.
That represented a total outlay (or "net debit") of $39 per share (the $40.50 stock price minus the $1.50 call premium).
If XLK traded for less than $40, the calls would expire worthless. We'd still own the stock, but we'd keep the $1.50 premium and the future dividend stream from XLK. That should amount to $2.26 (the $1.50 premium plus the $0.76 dividend) on a $40.50 investment, or about 5.6% this year.
But if XLK shares were selling for $40 or more on October 16, the stock would be "called" away from us at $40 a share. This gives a net gain of $1 per share on the position. Plus, we'd receive the $0.19 dividend in September. This is about 2.5% in less than two months, for an annualized return of about 11.5%.
On October 16, XLK was trading near $42. That meant our shares were called away. And we booked a 3.6% gain in less than two months. If you were to have that success each quarter, you'd earn about 14.4% a year trading options.
The great part is that unlike the housing example, you don't need someone to walk up to your door.
The options market is full of these types of folks... and they are always willing to pay you money.
I think every investor owes it to himself to understand this process.
On January 20, I'm going to take an hour or two to broadcast a live training session to show readers of Retirement Millionaire Daily and my other publications exactly how this works.
I strongly recommend you take a few moments to learn how to use this safe, conservative income strategy. Click here to learn more.
You'll come away with a new way to look at investing in stocks and building wealth. It's a dream strategy for real estate... and for stocks.
- Want to try trading options without risking your own money? Try the CBOE's Virtual Trade Tool.
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