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Big Stock Gains Versus Solid Gains

Updated on March 27, 2013

I Love Big Gains

If you are like me you probably really enjoy the grand slams! It's an awesome feeling to do your research, find the right pick, and make 300%, 700%, or even more on it. But like baseball grand slams don't happen every game and the reality is that you will probably take a lot of losses trying to get that grand slam.

But the thing that we have to realize is the emotions that come with the grand slam. Have you ever attended a baseball game? During the season people go to these games to enjoy the game. But it is during the grand slam (or other spectacular play) where people get off their seats and make a lot of noise.

More important than making a grand slam is playing a good game. The grand slams will come and they are always welcomed, but growing your account, personal wealth, and livilyhood is what investing is all about. In my ROTH IRA I take a very conservative approach to investing. I have a much smaller account where I have money I can loose and I do a lot of playing around with it. But the IRA has a purpose and I would like to share a thought with you in this HUB that will rack up some really solid gains for you.

Making Money Work For You

I personally think that Intel is a great company and they also pay a decent dividend. Therefore I would like to own this stock for a long time and allow it to compound its growth through it's dividends. While this is no recommendation for Intel for you, I like the prospects of it.

I am willing to buy this stock up to about $21.50 per share. Just recently this stock was trading in a range that I was looking at acquiring more shares. It had fallen below $21 and I was a ready buyer. But I decided to look at my options.

I could buy the number of shares I wanted or I could sell a naked Put causing me to be "put" 100 shares for every contract I sold. I will use one contract for the sake of simplicity in my example.

I looked at the most near term Put that was selling and I could sell contracts at about a price of $47 each. My first thought was, "$47 that's not much!" This was my Grand Slam thinking kicking in. But then I did the math.

For one contract my brokerage would charge me a $5.00 commission, which would net me $42.00. This was for a $21 strike price, which would control 100 shares of stock. If I was put the stock I would buy 100 shares per contract for $2,100.00. In other words, I would tie up $2,100 in order to net $42.00. Is that a good deal?

Let's play with the math and annualize it. Twelve months times $42 gives us $504.00. If I take this $504 and divided it into $2,100 I find that I would realize a 24% annualized return. I would say that is not too shabby in a zero percent world.

What is are my risk. First of all, I like Intel and I want to own it. My goal is to get put the stock. So Intel would need to trade below $21 in order for me to get put the stock. If Intel dropped to $19 I am still obligated to buy it at $21, which is not the best move in the world so I would be down initially. Remember this is a stock that I am comfortable owning for a long time. Therefore, even though I could have gotten it cheaper I still have met my objective of buying below $21.50. My cost to own the stock would be $2,100 - $42 = $20.58 or a buy price of $20.58 per share.

If the price increased and was above $21 I simply pocket the 24% annualized return and sell another Put until I acquire the shares I desire.

No, it's not the stand in your chair and scream "grand slam" that is so enjoyable, but turning your money over at 24% can pay off handsomely over time.


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