Editor's note: So far this week, we've shared some of Doc Eifrig's favorite vehicles for generating income… including dividend-paying stocks, closed-end funds trading at a discount, preferred shares, and REITs. Today, he shares an advanced trading technique that can safely generate double-digit annual income streams…
If you can understand real estate, you can understand the greatest income-producing tool for retirees.
Right now, my Retirement Trader readers understand this tool… These are regular investors (just like you). And they're using this tool to pull thousands of dollars out of the market every month.
Today, I'll show you how you can do the same…
It all starts with the familiar real estate idea of offering owners a lower price than what they are asking…
This strategy involves one of the most powerful – and most misunderstood – financial tools ever created: stock options.
When most folks hear the words "stock options," they think of risky bets on volatile moves in the stock market. Nothing could be further from the truth.
A stock option is simply a contract between two people. One type of option is called a "put option." The person who buys a put has the right – but not the obligation – to sell a stock at a given price, in a given time period. The person who sells a put has the obligation to buy a stock at a given price, in a given time period.
Done properly, selling put options is one of the greatest money-making strategies ever created. And it's simple, once you get the hang of it.
By selling puts, you can collect regular cash payments by offering to buy stocks at a discount.
Most of the time, these "discount" offers are not accepted. Most of the trades work out so that my readers get to keep the cash payments and walk away. But my service's history shows that around 20% of the time, our discount offers are accepted… And we are obligated to buy the shares.
When that happens, we turn into "stock market landlords."
Conventional landlords collect regular income on properties they own. It's a time-tested plan for getting a good, double-digit annual yield on your money. You also collect income on properties you own. Except these properties are in the stock market.
That means that unlike conventional real estate investing, this type of investing doesn't involve bank loans, fixing toilets, or dealing with tenants at 2 a.m.
Here's how it works…
After you buy a stock, you can enter the options market and sell someone the right to buy your stock at a higher price in the future. In return for agreeing to sell your stock, you collect cash upfront.
And no… using options in this way has nothing to do with the risky, "all or nothing" options strategies many people use. This is a very safe strategy. It's called "selling covered calls."
Again, this amounts to buying shares, then selling someone else the right to buy the shares from you at a higher price. I know it might sound like a strange transaction. But it happens millions of times a day…
Let me walk you through some numbers so you can see how useful a tool it is if you're looking for safe income…
Back in March, I told my Retirement Trader readers about a company that was thriving thanks to cheap oil. It's a major business with global operations, and it's earning a lot more now that oil prices are low. That company was Dow Chemical (DOW).
At the time, you could buy DOW for $50.88 per share. Let's say you bought 100 shares at the time, for a total of $5,088.
Right after buying your shares, you were able to sell someone the right to buy your shares from you for $50 per share any time over the next two months. You collected $2.13 per share ($213 per contract) for selling that right. That gave us an initial outlay of $48.75 (the $50.88 stock price minus the $2.13 we received from the call premium).
In May, DOW was trading for more than $50. So you would have sold at $50 and kept the $213 you got for selling the call… like a landlord selling the property to his tenant.
Because we sold covered calls with a strike price below the share price, we lost $0.88 per share when shares were called away from us. So our net gain was $1.25 (the $2.13 premium minus $0.88 per share). That's a safe return of 2.5% ($1.25 divided by the $50 strike price) in less than two months.
Now… if DOW hadn't been trading above $50, you would have been able to do pretty much the same trade all over again.
Do this "2.5% in two months" trade six times in one year and you can make 15%. You'd also collect DOW's safe 3.5% regular dividend. On a $50,000 stake, that would generate more than $7,000 a year.
And you need to understand… this trade wasn't just hypothetical. In May, my readers closed their sold covered calls on DOW for a 2.5% gain in less than two months.
We're collecting cash by making discount offers that are rarely accepted… And when they are accepted, we're able to use the covered-call strategy to generate even more cash.
Of course, this strategy takes a little bit more work than what you might be used to… But as many of my readers have discovered, it's simple to learn… and simple to use once you get the hang of it.
And becoming a "stock market landlord" is well worth the extra effort.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig
Editor's note: Covered calls are a great way for retirees to generate extra income. But Doc recently published a presentation detailing another vehicle for income investors that yields as much as 8%… And on September 16, shares could begin to soar. Learn more about this opportunity right here.