That is a kind way to describe how a bull market can turn vicious and hit your capital — the capital you are using to generate income — in the proverbial heartbeat.
Protecting that capital is the key to generating consistent income. That does not mean you run for cover into low-yielding equities or lower- yielding bonds. Do the opposite — embrace the market — just do it a couple of days at a time.
Not swing trading. Not buying stocks. Not buying options.
Selling options — selling put options and on stocks you own, selling covered calls.
And sell those options weekly.
Pull in 30% returns
The best way to protect capital, and realize potential returns as high as 30% a year is with a strategy built around weekly options.
Let me repeat, not buying them, but selling them, in what I call “The Flip.”
When you sell a weekly put, you collect cash and sell risk. And if you hit your target — the put expires worthless — you only pay commissions when you sell that put. In my service, Options Income Blueprint, we do this every week, typically selling a put or once in a while a cover call on Wednesdays, limiting our exposure to the market to less than three days.
There are now more than 170 stocks, ETFs and indices with weekly puts and calls. As you might guess, speculators love the opportunities to double their money or more while at the same time paying little to nothing for the time value of an option. Good for them.
But better for those of us interested in generating income. Weekly options offer one of the lowest-risk ways to generate consistent income over time.
One recent position speaks to the efficiency and profitability of selling weeklies. On a Wednesday we sold the General Motors (GM) February Week Two $28 put, getting $15 a contract. Sounds like too small a profit for all of you super-smart traders? Two days later the puts expired worthless. The return on the capital was 0.65%. Tiny, eh? Do it weekly throughout the year and your return is 32%. Not so tiny.
What looks attractive now
To make this strategy work you need low commissions and an account of at least $10,000. And you need to work it — you will need to put on positions most if not all the weeks of the year. But this strategy can potentially generate returns of 20% to 30% a year. I target 15% to 18% when discussing this approach in seminars since many people do not or will not put on positions every week.
As I mentioned earlier, I prefer selling weeklies on Wednesday although last week I sold Tiffany (TIF) puts on Monday. Those produced an annualized return of 30%.
What looks good right now?
Bank of America (BAC), if it holds at $12 or above through midday Wednesday. There is always the possibility you could be put the stock; BAC at $12 is a great value but you can always roll the put to the next week to avoid being put a stock when it temporarily goes the wrong way.