Yesterday was the highly anticipated September meeting of the Federal Reserve, so before I discuss our expiring option, let’s talk about what happened…
Just as I predicted, the Fed failed to deliver.
While many were expecting Yellen and Company to raise rates for the first time in nearly a decade, the Fed prolonged the inevitable rate hike once again, shifting market expectations to 2016.
You know where I stand — rates will be lower for longer than everyone is expecting.
That’s because once we finally get the first rate hike, it will not be immediately followed by another. Instead, I predict the Fed will lower rates again before a second hike.
Just think about it. Our government has more than $18 trillion in debt — about $154,500 of debt per taxpayer. And what happens if we raise rates? It slows the economy and raises the cost of our country’s debt. That leaves our government with less income while its liabilities rise. In short, a normalized rate environment could send our country spiraling into the greatest economic collapse ever.
The Fed doesn’t want this on its shoulders, and rightfully so. Janet Yellen can’t control what goes on in Washington.
For us, this is great.
The worries about when the Fed will or won’t raise rates will keep volatility relatively high in the markets, which means we’ll collect more income. And the lack of yield available from traditional sources will keep demand for the stable dividend-paying stocks we focus on extremely high.
We will continue with our current strategy, and I’ll look to incorporate our new naked call strategy on days when the market rallies higher. Just remember — we will have to be quick in a volatile market to collect our desired premiums, so pay close attention to your inbox in the coming weeks.
Meanwhile, today is option expiration Friday.
I have already rolled out two options that were set to expire, but we still have one left — Omega Healthcare Investors (NYSE: OHI).
Since we rolled our original Omega options “down and out” in June, we now hold the September 2015, $35 option. Yesterday, the stock rallied to within 1% of our strike price. But the market is whipsawing again today. Right now, it’s trading right at our strike price, $35.08. So it’s hard to tell where it will close. If it closes above $35 today, that’s great. You don’t need to take any action, and we’ll keep our premium and move on to another trade.
If shares fail to close above $35 today, we’ll end up being put the stock after the close. Depending on where it closes, you would be put the stock at a small loss, likely around 1%. Our cost basis will be lowered to $34.79 because of the options we have sold against the stock.
As usual, this is perfectly fine. We have a proven strategy to generate more income from stocks by selling covered calls. And in this case, we’ll also be picking up a 6.6% dividend yield.
Due to the volatility in the markets, I may send you trade alerts on any day of the week, depending on the market action. So follow your inbox closely, and keep in mind that I’ll let you know there is immediate action to take by including “Trade Alert” in the subject line.
Editor, Pure Income