Critical Alert: Before your neighbors realize what’s going on, you could pocket $10,000…$20,000 or even a $50,000 payout from this new, incredible – and government APPROVED – rollout. See what’s going on here.
I’m going to be blunt here – flipping stocks is the best way to make money in the market.
Really, it’s just like making money off of a house that you already own – but in the case of flipping stocks, you’re making money off of a stock you already own.
There’s just one issue – owning a stock can cost hundreds of dollars a share, and that’s a price I’m just not willing to risk.
But there’s one strategy no one else knows about that greatly reduces the cost – and allows you to rake in through-the-roof gains every single month.
Here’s how to play it…
Collect Monthly “Rent Checks” on Expensive Stocks with Covered Calls
We’ve talked about
covered calls before – maybe you’ve even tried them. They are arguably one of the most popular option strategies, as they give you a way to generate a regular monthly income. Basically, covered calls consist of buying the stock and then selling call options each month to collect the call premium. It helps if you’re also bullish on the stock.
For example, let’s say that you’re bullish on cannabis stocks and really like Canopy Growth (NYSE: CGC). It is the world’s largest cannabis company, after all.
(A quick note – I suggest if you’re at all interested in cannabis stocks you go here now and see what my friends at The National Institute of Cannabis Investors have just discovered…)
The first step with a covered call is to buy the stock. As you know, one contract is equal to 100 shares, so with CGC trading at $49, one contract would cost you $4,900.
|
$1.20 (June calls) X 100 shares = $120 per month
$120 per month X 12 months = $1,440 per year
$1,440 per year / $4,900 (stock price) = 29% ROI
|
Now, it’s time to collect your monthly check!
So, you sell 30-day call options (1 per 100 shares of stock) each month. Right now, CGC June $54 calls are going for $1.20, so for 100 shares your June rent would be $120.
Do this for a year, and you’ve pulled in $1,440, generating an annual return on investment (ROI) of over 29%. And if CGC goes up in price, which it will if your bullish prediction is correct, then you would make even more.
Now, an extra $1,440 per year is pretty impressive.
But there is a way to make that number much, much higher…
You can easily spend a lot less on the stock, all while reducing your overall risk and doubling your ROI. It’s as simple as a click of the mouse.
Instead of buying the stock, buy a long-term call option. This gives you the right to buy the stock without actually owning it, and it costs a lot less than owning the stock. Essentially, you’re “renting” the stock – which costs less than owning the stock, therefore lowering your risk – and actually raising your potential return.
Let’s look at the CGC January 17, 2020 $30 call for our long-term call option…
To buy the stock:
$49 X 100 shares = $4,900
To buy the option:
$20 X 100 shares = $2,000
|
Right now, you can buy this call option for $20. This gives you the right to buy CGC at the strike price, $30, until January 17, 2020 – or the third Friday in January, when the option expires. So, instead of paying $4,900 for the stock, you’re only paying $2,000 to control the same 100 shares.
When you buy the option, you can still collect your monthly rent…
By selling the same CGC June $54 calls that you did before, you can still make the same $120 per month. Again, that’s $1,440 per year – but you only spent $2,000 to get it. That’s equal to a 72% ROI, which is more than double the ROI available if you had bought the stock.
|
Buying the Stock:
$1,440 per year / $4,900= 29% ROI
|
Buying the Long Call Option:
$1,440 per year / $2,000 = 72% ROI
|
So now that you know buying a long call option is the better (and more lucrative) choice, one big question remains – which options should you buy?
The answer lies in understanding how options are priced…
How to Choose the Best Option for a “Supercharged” Covered Call
An option’s value is comprised of real value and time value.
First, let’s take a look at an option’s real value:
|
Stock Price – Strike Price = Real Value. |
So, with
CGC trading at $49 (stock price), a January $30 call gives you the right to buy the $49 stock for $30 (strike price) – making the
real value of a January $30 call $19:
Now, the rest of the option premium is the time value:
|
Option Price – Real Value = Time Value
|
If the January $30 call option is currently priced at $20 (option price), and $19 is the real value, then what’s left is $1 – the
time value:
Now, this $1 in time value adds risk to your position. At expiration on January 17, this $1 will be gone – but that’s not a problem. This $1 of time value gives us
eight months to sell the calls. In fact, in the first month we make more than $1 in covered call premium – which eliminates the risk of time decay immediately.
- Buy call options that are 6-12 months in-the-money (ITM). This means that the call option’s strike price is less than what the stock is currently trading for.
- Select ITM calls where the time value is less than or equal to premium on the short-term calls you’re selling.
|
This leads to my long call selection rules:
In our CGC example, you bought the January 2020 $30 call option – where your time value is $1.00. You also sold the CGC June $54 call for $1.20, paying for the time value in the long January 2020 $30 calls.
And that’s exactly how to supercharge your covered calls – by buying ITM call options instead of owning the stock. It’s simple, costs less, and makes more money.
Now, I break down strategies like these even further at the beginning of every single month in my Million Dollar Masterclass sessions.
These live trading demonstrations – and a virtual step-by-step walkthrough – help you master the techniques we talk about often so you can feel confident using them in your everyday trading.
It’ll be like you’re looking right over my shoulder.
To make sure you’re set up to attend my next one, go here now.
Good trading,
Tom Gentile,
America’s #1 Pattern Trader
