3 Steps for Turning Any Stock Into an Instant Income Machine
The trade war has weakened the global economy.
Many investors are waiting for the Federal Reserve to cut interest rates to support the economy. It’s a major shift from what we saw in 2018, when everyone thought rates would creep higher.
After the Fed raised rates four times last year, everyone knew it would pause as we went into 2019.
But expecting rates to decline from here comes in sharp contrast to a booming economy.
If you’ve pinned your hopes on seeing savings rates of 4% or 5%, then I’m sorry — it’s not going to happen.
For those of you who are in need of income, you’ll need to continue supplementing it in the stock market.
The key is to do it without unnecessary risk.
There are a few tricks to do this. And today, I’m sharing one of my favorite ways with you.
I’m going to give you my three simple steps to turn any winning position into an instant income machine…
3 Simple Steps to Follow
To learn more about my strategy, watch my video below.
Now, the income strategy I’m sharing with you today may be unlike anything you have heard of before.
But trust me: My three steps make it an easy process and a surefire way to collect income.
Most people only think of income in the market as a form of dividends.
I’ve talked about a strategy to generate income by selling put options — it’s my favorite all-time income strategy.
But when I own a stock, I have a different go-to income strategy — selling covered calls.
This is completely different from buying call options. Buying calls is making a bet that the stock will rise.
Instead, we’re agreeing to sell our shares at a certain price. In return, we collect a premium to make that agreement.
And I have three simple steps to ensure that every covered call I place is maximizing my income potential.
No. 1: Always Sell High
The first step is simple — always sell high.
Since we collect this income for agreeing to sell our stock, we will always select a call option with a strike above where the stock is currently trading. Then we’ll agree to sell our stock at a higher price and get paid to do so.
It’s that simple!
But it’s important to know that this caps your upside. So, if you think the stock could surge 50% or more this year, don’t bother trying to collect income from it.
If you think it’s only got 10% or so left in the tank, then by all means, begin selling covered calls to generate income.
I find that selling at about 3% to 5% above the stock’s current price is the sweet spot for selling higher.
No. 2: The 3% Rule
The second step is to collect enough income for the risk. Now, the risk is that the stock could fall, which means you will continue owning shares.
It’s not that big of a deal, but it means you’ll want to make your exit strategy pay you a decent income.
There’s no point in collecting just $10 a contract, or $0.10 per share. It simply isn’t enough income for me to be willing to sell my stock.
I prefer to collect 3% in income for making this agreement.
When you combine that with selling at a price that is about 3% to 5% higher, it makes for a solid income strategy. And you can do it over and over again!
No. 3: Knowing the Timeline
The third step is to determine how long you are willing to hold the stock.
With options, you can pick when the contract, or agreement, will expire. So if you are trying to exit before the next earnings announcement, make sure to select an option that expires before then.
Then, if the stock doesn’t get sold on that date, you can either close it at the market or sell another covered call.
Either way, the income we were looking to collect stays in your account. It’s your instant income that you can generate over and over again until the covered call closes out your stock position.
Here’s a real-life example of how this works.
A 7% Yield … Over and Over Again
In my premium income service, Pure Income, we ended up owning shares in Qualcomm Inc. after we sold a put option on the stock to collect income.
Whenever this happens, I love implementing my covered call strategy to continue generating income. In fact, we turned around and sold a covered call to add income to the position.
In six months, we walked away with a 7% yield from this position — that means we didn’t benefit from the stock’s price movement at all.
Now, I used Qualcomm as an example because something unique happened to the stock in April. It rocketed nearly 50% higher after the company reached a settlement with Apple.
Since we sold a covered call, our gains were capped at the 7% yield.
That’s a great return no matter how you look at it, and it equates to a 14% yield for the year — far better than any other income strategy you’ll find.
But this is important to keep in mind: Don’t use this strategy with stocks you’re convinced will rise before the option expires.
I didn’t see the settlement coming for Qualcomm when we sold covered calls. But I’ll take the 7% yield over and over again.
Covered calls have been a great way for me to turn a winning position into an instant income machine. And using my three steps will have you on the path to do so as well.
But if your goal is to collect income, I have a different strategy that I use for my income service, Pure Income. To learn more about this strategy, click here.
Chad Shoop, CMT
Editor, Automatic Profits Alert