Deprecated: mysql_connect(): The mysql extension is deprecated and will be removed in the future: use mysqli or PDO instead in /home/a26f9f83/public_html/articles/includes/config.php on line 159
A Triple Dipper: How to Make 3 Profits on 1 Stock Trade > NetSparsh - Viral Content you Love & Share

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

This is a rather simple strategy with which I am sure a lot of seasoned traders are very familiar, possibly under some other name with which I am not familiar. I wanted to write about it because I don't see anyone talking about it anymore. Since the big hey-days of day trading and, of course, the burst of the Internet bubble of 2000, there seems to be a lack of patience that this strategy needs to work.

A lot of people seem to be moving back into the markets since the declines of 2000. If you were one of those that jumped back in during the early part of 2004 you reaped big profits. But now there seems to be a fair number of Wall Street Pundits that are beginning to raise the "irrational exuberance" flag once again. If you have been watching some of the unrealistic gains in recent high flyers, you may be looking for a bit more conservative way of being in the market.

In the early 70's I met a young Dean Witter Reynolds broker and told him I had a few dollars I wanted to put into the stock market. The first thing he told me was that unless I had $100,000 I wanted to invest one time into a diversified portfolio with a buy and hold strategy?or?. $10,000 I wanted to invest in a more aggressive "trading" strategy, he was not interested in my account. Keep in mind, this was a long time before the day trading craze hit. I was impressed with his straightforward and honest approach. However, I did not have $100,000 back then, but I did have a bit more then $10,000. With that we were off to the races, and this is the trading plan he put to work for me.

First of all he stayed away form the high flyers altogether. He followed a number of solid, top quality companies that had a history of paying above average dividends but still with a little bit of volatility. Both the dividend and the volatility are required ingredients.

We bought six to ten positions with an average of 300-500 shares in each position. Every stock we bought paid higher then 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 Motors [GM] and few others. I only mention them so you that are nuts-o for research (exactly the sort of thing I would do) can go back and see the sort of movement we had in these stocks back in those days. There were others of course, but that will give you some fodder for research. GM and MO may still work these days, but I have not looked at AEP in years and, of course, Battle Mountain is history.

Okay, so now you know what sort of companies we are looking for; solid, higher then average dividend paying companies 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 make the triple dip into the money - Options. To be more specific, we need Covered Calls only!!! Let me repeat that, we are only selling covered calls, no other options. You will have to be cleared by your broker for options trading, and you will need a margin account.

Here's how the play is made. You buy 300-500 shares of a stock that is going to be paying a dividend with in the next 15-45 days. You sell the 30-60 day covered call taking in the premium money and giving you that amount of money downside protection to offset any move against you.

The ideal trade will play out like this. You will buy the stock, it will pay the dividend while you own it, you sell the Covered Call collecting the options premium money, and hopefully the stock will be called away at the strike price. Obviously, you have to make sure you only sell the call with a strike price higher then your entry price.

Now let's apply the math on a hypothetical trade. Let's say you buy MO at $50 and it is paying $.25 dividend and the $51 call option is selling for $.25 with an expiration date 45 days out. Let's further assume the stock pays the dividend, and moves above the strike price of $51 by the expiration date and it gets called away. You will earn $.25 for the dividend, $.25 for the premium money on the call and $1.00 on the stock position itself for a total gain of $1.50 on 300 shares. That's $300 on a $7500 investment (using 2:1 margin account) for a 24% annualized yield on your money. More of the math: $300 divided by $7500 = 4% X 8 = 24%. Keep in mind you made the $300 in 45 days meaning theoretically you can do this 8 times a year. That's how you get the 24% annualized yield. Not to shabby! (Because commissions vary, I have not put them into the equation, something you will have to do obviously.)

Seems pretty easy doesn't it? Well it is, when it works. But like everything in the stock market (or in life itself for that matter) there is no sure thing.

Any number of things can happen. Here are just a couple of things you have to consider. First off, I would check to see what all the analysts are saying about any stock you are about to try this on. Make sure the company has a solid dividend history. I would also caution against making the play on a stock that is due to report earnings while you are in the options period. Also keep in mind that as a general rule a stock will dip in direct relationship to the divided paid.

Obviously this strategy is not always going to play out as our hypothetical trade did. However, I have had results similar to that as well as some much better, and "yes" some that did not work at all. What makes the play less risky than the stand alone buy and hold trade is that no matter what the stock does, you get the dividend and the options premium money giving you that much downside protection on a move against you.

I had a number of stocks that I would hold in my account and merely roll over the option money and collect the dividend on a regular bases, double-dippers, and was very happy not to have the stock called away.

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

To learn more about Covered Call writing, check the resources at http://www.TraderAide.com. Good luck and happy trading!

No permission is needed to reproduce an unedited copy of this article as long the About The Author tag is left in tact and hot links included. We do request that we be informed of where it is posted so reciprocal links can be considered. Email floyd@sbmag.org.

Floyd Snyder has been trading and investing in the stock market for three decades. He was on the forefront of the day trading craze that swept the nation back in the late1990's both as a trader and as the moderator of one of the Internet's largest real time trading rooms. He is the owner of http://www.TraderAide.com, Strictly Business Magazine at http://www.sbmag.org, http://www.FrameHouseGallery.com and http://www.EducationResourcesNetwork.com

In The News:

This RSS feed URL is deprecated, please update. New URLs can be found in the footers at https://news.google.com/news

Motley Fool

200 Stock Advisor Picks, 6 Conclusions, No. 5: "Using This Service, You Should Beat Your Mutual Funds"
Motley Fool
Journey in your mind back to March 2002. The stock market was still stumbling around in the aftermath of the dot-com crash, and retail investors were running scared. It was in that environment that Tom and David Gardner launched a monthly newsletter ...

and more »

Barron's

The Stock Market Was Scary This Week. Here Are 5 Mutual Funds for Income Investors
Barron's
Investors have plenty of options for income-oriented mutual funds. The table below lists five such portfolios, which are also known as multi-asset income funds. “Investors really need to look a bit deeper to see exactly what the strategy is to generate ...


Forbes

Billion-Dollar Portfolio: 10 Stocks To Buy Now
Forbes
Under my definition, that's the line between a small-capitalization stock and a mid-capitalization one. I like this size because such stocks are small enough that they haven't been discovered yet by most big mutual funds or pension funds, but they're ...


Zacks.com

Will Record Outflows Spell Doom for Mutual Funds?
Zacks.com
However, in the preceding week, all three major stock indexes fell and posted the worst weekly performance since March. Both the Dow 30 and the S&P 500 registered weekly increase after three consecutive weeks of loss, while the ... As per the latest ...

and more »

Nasdaq

Is Schwab Total Stock Market (SWTSX) a Strong Mutual Fund Pick Right Now?
Nasdaq
If you're looking for an Index fund category, then a possible option is Schwab Total Stock Market (SWTSX). The fund does not have a Zacks Mutual Fund Rank, though we have been able to explore other metrics like performance, volatility, and cost ...
3 Best Mutual Funds to Buy as Industrial Production Picks Up AgainInvestorplace.com

all 4 news articles »

Investor's Business Daily

Growth Stocks That Fuel This Mutual Fund Manager's Outperformance
Investor's Business Daily
31, the fund managers had outperformed the S&P 500 for the calendar year as well as the previous three, five and 10 years. That four-for-four outperformance makes the Prudential mutual funds' portfolio an IBD Best Mutual Funds Awards winner. Merely 10% ...


Investor's Business Daily

Best Mutual Funds Buying CVS, United, Lowe's And These Other Top Stocks
Investor's Business Daily
Eleven stocks from the medical sector made this month's list. Thirty-seven top performing mutual funds invested just under an estimated $160 million in biotech industry leader Biogen. Abbott Laboratories (ABT) (35 funds, $258 million), HCA Healthcare ...


TheStreet.com

US Stock Futures Gain as China Tax Pledge Sparks Rally, Steadies Global Market
TheStreet.com
Want to Buy $1 Worth of Stock for 90 Cents or Less? You can with certain so-called "closed-end" mutual funds - an often overlooked investment class. Click here to register for a free online video in which TheStreet's retirement expert Robert Powell and ...

and more »

Investor's Business Daily

Dow Jones Futures Rise After More Leaders Break Support In Stock Market Correction
Investor's Business Daily
Top stocks often find support here, as mutual funds and other big investors step in to buy shares. While it's OK for a leading stock to dip below the 50-day line for a short span, you want to see it rebound soon. But in a stock market correction, most ...

and more »

Investor's Business Daily

Techs Boost Stock Futures As China Stock Market Rallies
Investor's Business Daily
Top stocks often find support here, as mutual funds and other big investors step in to buy shares. While it's OK for a leading stock to dip below the 50-day line for a short span, you want to see it rebound soon. But in a stock market correction, most ...

and more »
Google News

Selling Strategies - Setting a Stop Loss

Sometimes the best way of lowering exposure to risk is... Read More

A Stock Market Investment Strategy

I feel that an investment strategy in the stock market... Read More

Inverted Interest Rates

Inverted interest rates? What's that? Who cares? Even if you... Read More

Stock Market Education; Day Trading for Beginnners; How to Pick Stocks

The trading method you employ to approach the stock market... Read More

Psychology ? How to Reduce Negative Thoughts Relating to Trading?

The thinking process of the brain relating to the... Read More

The Elephant

Four blind men were asked to give a description of... Read More

Selling

The stock market has been going up for more than... Read More

Stock Market Diversification

In one of my previous articles (Investing in the stock... Read More

Never Lose Money

Never lose money in the stock market again. Yeah, I... Read More

The Stock Market Investor?s Worst Enemy

Every stock market investor faces one primal enemy. An enemy... Read More

Starbucks Stock is Up

Starbucks earnings are up again and so is their stock... Read More

Zero Sum Game

Most people think the stock market is a zero sum... Read More

Are You A Stockaholic?

Today's society gives special recognition to alcoholics, sexaholics, binge-aholics, shopaholics,... Read More

Lifestyle Funds Provide Greater Security?

With the stock market stubbornly refusing to settle down and... Read More

Enron Cure

Let's hope you did not have any of the Enron... Read More

More Window Dressing

Two weeks ago I wrote about what the Securities and... Read More

Choosing a Stock Broker

If you were to find that you had some severe... Read More

Economists

In today's volatile and confusing stock markets everyone is searching... Read More

Stealth Bull

If you have been watching the stock market at all... Read More

Lies, Damn Lies and Mutual Fund Returns

How many times has this happened to you? You're at... Read More

How to Pick Winning Stocks

There is nothing more exciting than finding an undervalued stock... Read More

Can?t Stand The Heat

It seems that every day I turn on the TV... Read More

The Golden Goose is Sick

It is finally catching up with them. The brokerage companies... Read More

Stock Loans

Hedge current portfolio positions and gain access to capital resources... Read More

Evaluation II

As I said in Part I everyone in the insane... Read More