A Triple Dipper: How to Make 3 Profits on 1 Stock Trade

This is a fairly simple strategy that I am sure many experienced traders are very familiar with, possibly some other name that I am not familiar with. I wanted to write about it because I don’t see anyone talking about it anymore. Ever since the big days of intraday trading boom and of course the 2000 internet bubble burst, there seems to be a lack of patience for this strategy to work.

A lot of people seem to be coming back to the markets since the crashes of 2000. If you were one of those who rose again during the first part of 2004, you will reap big profits. But now there seem to be quite a few Wall Street experts who are beginning to raise the banner of “irrational exuberance” once again. If you’ve been looking at some of the unrealistic gains in recent high-flights, you may be looking for a slightly more conservative way to be in the market.

In the early 70’s I met a young Dean Witter Reynolds broker and told him I had a few dollars that I wanted to put on the stock market. The first thing he told me was that unless he had $ 100,000, he wanted to invest once in a diversified portfolio with a buy and hold strategy … or … $ 10,000 he wanted to invest in a more aggressive “trade”. strategy, I was not interested in my account. Keep in mind that this was long before the day trading craze hit. I was impressed by his straightforward and honest approach. However, he didn’t have $ 100,000 back then, but he did have a little over $ 10,000. With that we were on our way to racing, and this is the business plan that he put to work for me.

First of all, he stayed away from high-flying. It followed a number of strong, high-quality companies that had a history of paying above-average dividends, but still with a bit of volatility. Both dividend and volatility are mandatory ingredients.

We buy six to ten positions with an average of 300 to 500 shares in each position. Every share we bought paid a higher than average dividend. We did well with companies like Phillip Morris [MO], American Electric and Power [AEP], Battle Mountain Gold Co. [now a pink sheeter], General engines [GM] and few more. I’m just mentioning them so that you who are crazy about research (exactly the kind of thing I would do) can go back and see the kind of movement we had in these stocks in those days. There were others, of course, but that will give you some research material. GM and MO may still work these days, but I haven’t looked at AEP in years and of course Battle Mountain is history.

Well, now you know what kind of companies we are looking for; Solid companies that pay above-average dividends with a bit of volatility. Hey, I never said this was easy! But to make it even more challenging, we need one more component to triple-dip money: options. To be more specific, we only need covered calls! Let me repeat, we only sell covered calls, not other options. You will need to be authorized by your broker for options trading and you will need a margin account.

This is how the play is done. Purchase of 300 to 500 shares of a share with which a dividend will be paid in the next 15 to 45 days. Sell ​​the covered call for 30 to 60 days by taking the premium money and giving you that amount of money with downward protection to offset any moves against you.

The ideal exchange will unfold like this. You will buy the shares, pay the dividend as long as you own them, sell the Covered Call option for the option premium money, and hopefully the shares will be canceled at the strike price. Obviously, you need to make sure that you only sell the call with a strike price higher than the entry price.

Now let’s apply the math to a hypothetical operation. Suppose you buy MO at $ 50 and pay a dividend of $ .25 and the call option for $ 51 sells for $ .25 with an expiration date of 45 days. Suppose further that the stock pays the dividend and moves above the strike price of $ 51 on the expiration date and is canceled. You will earn $ .25 for the dividend, $ .25 for the premium money on the call and $ 1.00 on the stock position for a total profit of $ 1.50 on 300 shares. That’s $ 300 on a $ 7,500 investment (using a 2: 1 margin account) for a 24% annualized return on your money. More of the math: $ 300 divided by $ 7,500 = 4% X 8 = 24%. Keep in mind that you made $ 300 in 45 days, which means that in theory you can do it 8 times a year. Here’s how you get the 24% annualized return. Not bad! (Since commissions vary, I have not included them in the equation, something you will have to do obviously).

Sounds easy enough doesn’t it? Well, it is, when it works. But like everything in the stock market (or in life itself for that matter) nothing is certain.

Many things can happen. Here are just a couple of things to consider. First of all, I would check what all the analysts are saying about any stock where this is about to be tested. Make sure the company has a strong dividend track record. I would also warn against gambling with a stock that must report a profit while in the options period. Also note that as a general rule, a share will fall in direct relation to the split payout.

Obviously, this strategy will not always play out as our hypothetical trade did. However, I’ve had results similar to that, as well as some much better ones, and “yes” some that didn’t work at all. What makes the game less risky than the stand-alone buy-and-hold operation is that whatever the stock does, you get the dividend and option premium money, giving you plenty of protection for the stock. go down in a move against him.

I had a series of shares that I would have in my account and I would simply roll over the option money and collect the dividend on a regular basis, with double cadence, and I was very happy that the shares were not withdrawn.

I was very lucky to have met a broker who became one of my best friends and taught me this investment method. I strongly suggest that you seek the advice of a professional broker; money manager; his lawyer; your accountant; your present, past or future wife or husband; your doctor; your heirs, your auto mechanic, or anyone else in the world you can think of before trying this or any investment method. (Okay, I think that covers everyone.)

For more information on covered call writing, see the resources at http://www.TraderAide.com. Good luck and happy trading!

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