By Jeff Clark
I love bad stock markets.
Bad markets create opportunities. Bad markets restore equilibrium and logic to stock prices. And the best part of all – bad markets cause option premiums to inflate faster than a rubber raft at a fourth-grader's pool party.
That's great news for folks who want to collect quick income on stocks they already own.
What you do is sell calls on those stocks (i.e. "covered" calls). All you're doing is agreeing to sell your shares at a specified price by some future date. In exchange, you collect income. And you get a built-in insurance policy against downside risk. It's that simple.
Let me show you an example... Back in February, I told subscribers to Advanced Income – my covered-call advisory – to buy shares of a silver miner called Silver Standard Resources (SSRI). At the time, precious metal stocks were in a bad market. The sector was falling, and SSRI was trading 25% down from its high.
The bad market gave us a chance to buy SSRI at a cheap price. It also gave us a chance to collect a huge "dividend" by selling calls against our shares.
We bought SSRI at $17 a share. And we sold the June 20 calls for $1 each.
Think about it...
We bought SSRI at $17 and pocketed $1 in income right away. All we did was give someone else the right to buy the stock from us at $20. In other words, we got paid almost 6% to agree to sell the stock for a 17% profit.
The only way we'll lose money on this position is if SSRI drops below $16 on option-expiration day in June (which is coming up next Friday). That's more than 10% down from today's levels, so I don't think it's likely.
And even if the stock does fall below $16, we'll still be able to recoup any downside loss by selling additional calls against the shares.
Right now, with one week to go until expiration, SSRI is trading around $18 per share. Since our net investment in this position is $16, we're up $2 on the trade – a gain of 12.5% in only four months. The odds are pretty good the options will expire worthless. So, next Friday, we'll be selling another series of options against our shares. We'll pocket another large "dividend," capture even more downside protection, and leave open the possibility of more capital gains.
Like I wrote earlier... I love bad markets.
Right now, oil stocks are in a particularly bad market. The disaster in the Gulf of Mexico along with general stock market weakness is depressing oil company stock prices. That's good news for you, me, and anyone else looking to generate high income safely.
We can buy stocks at depressed prices and create huge income streams by giving someone else the right to buy the shares from us at a profit.
I'm recommending two covered call trades on oil stocks in my next issue of Advanced Income – due out later today. Both trades pay an immediate "dividend" of 8% and can earn another 8% in capital gains over the next month.
Selling covered calls on depressed stocks is one of the best ways to generate high income streams. And right now, we're seeing some of the greatest opportunities we've seen all year.
Best regards and good trading,
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