Contrary to what many investors think, options can often be used in a very conservative and profitable way to manage and reduce risks, manage portfolio positions and increase a portfolio yield.
Selling cash-secured puts is a safe way to generate income on your cash and get paid while waiting to get long a solid stock you want to own at an attractive price. It is then a great way to continue generating income from your existing position or increase your ownership in a stock at a lower and even more attractive level. When properly executed on carefully selected stocks, this strategy is a key tool for long term success.
Selling calls on stocks you own (also named “covered call writing”) is a good way to boost your yield while giving you some additional downside protection. When selecting the strike at which to write the call, an investor needs to strike the right balance between the degree of protection wanted and the willingess to retain ownership of the stock (i.e. not have the stock called away).
Selling both calls and puts (also named “selling strangles”) on existing long stock positions, when properly executed and managed, can be a tremendous way to significantly increase the income generated by your holdings while reducing your risk. It also forces you to buy low and sell high.
Our upcoming Premium Income Portfolio will make an active use of the above strategies to build core long term positions in strong dividend stocks while lowering your cost basis, and increasing the yield and overall returns of the portfolio. Eventually, after several years of consistently using these techniques, you could have collected enough money from selling options to reduce your cost basis in the stocks you own down to zero.
By selling options, you put the odds in your favor, as 80% of options expire worthless. In other words, 80% of the time you will be able to keep all the profits from the premium received for you. And the rest of the time, you will own shares of a stock you like at discounted price (in the case of put selling), or sell your shares for a profit and after a siginifcant rise (in the case of call selling).