By Jeff Clark
You'd be hard-pressed to find a worse time to buy a stock than January 2008.
The market was just starting to struggle after the big rally that
started in March 2003... the worst credit crisis in generations was in
the future... and stocks went on to lose half their value over the next
15 months.
Yet by following a strategy I've been writing about for years in these pages,
Advanced Income readers who bought on my recommendation in January 2008 are up 40%.
I've often written about this strategy as a way of generating income
from stocks in a sideways market. And it remains an excellent way of
getting juice from a conservative stock portfolio.
For most investors, stocks have been relatively juice-free for much of
the past two years. The bear market has taken its toll on the "buy and
hold" philosophy, and the returns on most portfolios have been about as
juicy as a peach pit.
But as my
Advanced Income readers can tell you,
there is a way to squeeze high returns out of stagnant or downtrending stocks: selling covered calls.
The strategy basically involves buying a low-risk value stock at a
bargain price and then selling to someone else the right to buy the
stock at a higher price. In other words, selling calls.
Let me show you how well it worked with King Pharmaceuticals (
), the longest-held position in the portfolio of
Advanced Income.
We bought the stock in January 2008, just as the bear market was
getting started, and we've sold covered calls against it several times.
As you can see from the following chart, the stock has fluctuated along with the market...
KG has traded above our $10 purchase price, and as much as 40% below it. But by selling covered call options
we've always been profitable on this trade.
In fact, yesterday, the stock closed a bit below our original purchase
price. But we're still up nearly 40% over the past 18 months.
The stock has gone nowhere, but we've made a bunch of money. And we'll make even more when we sell additional calls against the shares after our July options expire next week.
This is an excellent example of the value of selling covered calls.
If you're looking for a way to squeeze a little extra juice from your portfolio, give this strategy a try.
Best regards and good trading,
Jeff Clark
