Accelerate Your Monthly Income by Combining Trading Techiques

If you had the opportunity to read my articles about using dividend stocks to generate monthly income, selling covered calls for monthly income, and selling puts for monthly income, then this article will explain how you can combine the techniques so that you can have the potential to consistently generate income and know when to take profits.  If you haven’t read the articles, I would suggest doing that now and coming back to this one.

I’m going to use the same dividend portfolio that I set up earlier. 

Remember:  I am not necessarily recommending these particular stocks, but am merely providing an example using real stocks and numbers to illustrate a technique.

Our dividend portfolio consists of the following five stocks that were purchased in early June 2009 at the prices shown:

Walmart 1,000 shares @ 51.07/share

Coca-Cola 1,000 shares @ 49.44/share

Microsoft 2,000 shares @ 22.14/share

JP Morgan Chase 1,500 shares @ 34.55/share

Verizon 1,500 shares @ 29.25/share

Each of the above stocks pays a quarterly dividend as shown:

WMT @ 0.273 per share would give us $273 per quarter

KO @ 0.41 per share would give us $410 per quarter

MSFT @ 0.13 per share would give us $260 per quarter

JPM @ 0.05 per share would give us $75 per quarter

VZ @ 0.46 per share would give us $690 per quarter

Now if you look at the charts for these stocks over the past year, you can get a sense that they spend part of the time above a certain price and part of the time below a certain price.  Using that information, you can enhance your income by selling covered calls to start.  Let’s use WMT as an example:  Going to the option tables for July 2009, we see that today with WMT closing at 48.25 you could sell the July 50 call for 0.66 per share of the 52.50 call for 0.17 per share.  You would add this covered cal premium to your income and could do this on a monthly basis. 

WMT pays a dividend in August.  Alternatively, you could sell the September 52.50 call for 0.95 per share.  Then you would be guaranteed to collect the $273 dividend plus receive $950 today for the covered call premium.  Furthermore, you would receive the 1.43 per share capital gains on the stock if it is called out.  You could do this for each and every stock and thus enhance your cash flow.

What if WMT does get called out?  You have to decide where you would like to buy it back.  Maybe it just goes up to 53, and you would be willing to buy it back at 52.50.  Maybe you would prefer to wait until it hits 50.  Sell a put at that level and collect money while you wait.  When it does drop, you will own the stock again, collect the dividends and can sell covered calls again, repeating the process.  Obviously, this technique works best with a reasonably stable stock in a healthy company in a reasonably stable market.  But what if the market is volatile like it has been recently?  First, I would point out that only JPM was off greater than 50% from its 52 wk high, and I am using a financial stock only as part of the illustration.  Besides, you still maintain the risk of holding the stock anyway.  It can drop 50% if you sold a call or not.

One of the concerns with selling covered calls is that you limit your upside potential.  You want to sell that covered call and get the extra income, but you are afraid of missing out on the gains.  So sell a call on half your position.  Sell the WMT September 52.50 call on 500 shares and collect $475.  Then wait to see what happens with the stock.  If it goes to 55, you get called out but still have some shares left participating in the rally.

When it comes time to sell the puts, sell some and keep some capital on the side.  See what happens.  If the stock declines, you can sell more puts at a lower price and try to probe for a bottom.  You may find yourself mixing and matching with some outstanding calls on shares you own and puts that you have sold to pick up more shares at a cheaper price. 

Look at the chart for WMT over the past 5 years.  It has ranged from about 42 up to 63 but has stayed close to 50.  If you bought 5 years ago, in June 2004, you would have picked it up for about 55 per share.  Now, after holding all that time, you would have just about broken even when adding dividends.  Wouldn’t it have been nice to be able to sell when the stock is up by getting called out and buying at lower prices when the stock has fallen back down all the while getting paid to wait?  Buying low and selling high.  Knowing when to take profits.  You can’t help it when the options dictate the results.