Regular Digest readers know... we believe selling covered calls is one of the safest and most consistent ways to generate income in the market.
In his Advanced Income service, Jeff Clark used that strategy to close 85% of his trades last year at a profit. His average return was 20.6% – an astounding performance that merited an "A++" grade from Porter in Friday's Report Card.
One reason selling covered calls is effective is that you can still make money on a position, even if the share price remains flat or even declines a little. (The strategy sacrifices some upside potential... But giving up some of the upside is what allows you to greatly increase your odds of profiting on each trade.)
Selling covered calls is simple... You buy an undervalued stock and sell call options against that stock to collect immediate income. (The income is the premium you receive from selling the call option.)
And right now, you have an opportunity to collect a 4.5% dividend in one month by selling covered calls on one of the most popular stocks in the market...
Shares of computer and consumer-electronics giant Apple (AAPL) have fallen from a high of more than $700 in September to a bit more than $500 today. (Shares broke below the $500 level on Tuesday, but have inched up since then.) That's a nearly 30% drop in a few months – a great setup for a covered call trade.
Because Apple shares have such a high price, they're expensive to trade. So this trade isn't for everyone. (But regardless... it's an excellent example of what to look for in a covered call trade.)
You can buy 100 shares of Apple today for $503 a share (a $50,300 total outlay). And you simultaneously sell the AAPL February $505 calls against that position. You pocket an immediate $22.40 per share payment. (An option contract is 100 shares, that's $2,240 immediately deposited in your trading account...) That cash is called the "premium," and in this case, it's equal to 4.5% of what you paid to buy the stock.
If Apple shares trade for more than $505 by the day they expire (February 16 – less than a month away), you will be required to sell your shares for $503 each. That's known as having your shares "called away"... You pocket the $2 per share in capital gains. And you keep the initial $2,240. That's a potential gain of 4.9%.
If the stock trades for less than $505 by February 16, the options expire worthless. You keep the $2,240 premium and continue holding AAPL shares. You can sell another set of short-dated calls against the position and collect more income.
This is a great example of a covered call trade... Apple is a solid stock that got whacked over the short term. And the option premiums are healthy, giving us the opportunity to collect a 4.5% dividend in one month.
How to collect a 4.5% dividend today...
In today's Digest Premium... we'll show you how to use one of Jeff Clark's favorite trading strategies to collect an immediate 4.5% income payment on one of the hottest stocks in the market today.
To continue reading, scroll down or click here.
How to collect a 4.5% dividend today...
How to collect a 4.5% dividend today...
In today's Digest Premium... we'll show you how to use one of Jeff Clark's favorite trading strategies to collect an immediate 4.5% income payment on one of the hottest stocks in the market today.
To subscribe to Digest Premium and access today's analysis, click here.
A one-word risk-control strategy... The Fed is finally getting worried... Matt Badiali's big uranium winner... More bullish housing news... Sjug's 45% gain on TWO...
The February issue of The 12% Letter issue, which hit inboxes earlier this evening, focuses on risk in income stocks.
In it, my research partner Mike Barrett and I (Dan Ferris) compare the risk characteristics of several categories of income stocks, including real estate investment trusts (REITs), business development companies (BDCs), and royalty trusts. We've even created a brand-new tool, called "The 12% Letter Income Stock Risk Continuum." It lists several types of income stocks in order of risk. What we deem the "riskiest" group of stocks will shock most readers.
We also address risks you might not even know existed. These risks are present in some of the most popular income stocks in the world today. We look at the bond mania and tell readers what we're currently doing about it. We'll show you how we limit risk on every recommendation we make. And we'll tell you the one word you need to remember to help you play it safe on every investment you make.
If you want to know what the most and least risky income vehicles are today, you won't want to miss this issue. Click here for access to The 12% Letter. If you decide it's not for you within four months, you can get a full refund. (That's the only "zero-risk" proposition I've found lately!)
Oh, those urbane sophisticates at the Federal Reserve... fashionably late as ever...
Four years into a bona fide bond-buying mania, the Federal Reserve is finally starting to worry that markets for risky investments are getting "overheated."
As if trying to prove to her boss that she really does read the papers and watch CNBC, Kansas City Federal Reserve Bank President Esther George said in a speech last week...
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Prices of assets such as bonds, agricultural land, and high-yield and leveraged loans are at historically high levels. We must not ignore the possibility that the low-interest rate policy may be creating incentives that lead to future financial imbalances.
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Future imbalances? Junk bonds are yielding less than 6%. Non-irrigated farmland is up 25% over the past year, and George is talking about future imbalances. Present imbalances seem bad enough.
Lawrence Goodman, president of the Center for Financial Stability and former director of Quantitative Policy Analysis for the U.S. Treasury, is a bit more forthcoming. Goodman told the Bloomberg news service, "There are extreme market distortions occurring due to the unusual monetary policy."
The policy Goodman is referring to has, since September 2008, seen our glorious Komrade Bernanke print just more than $2 trillion of fresh, new U.S. dollars out of thin air and electrons... using most of it to load the Fed's balance sheet up with U.S. Treasurys and mortgage-backed securities. Total outstanding Fed credit has more than doubled in just over four years.
Russia is getting serious about uranium. On Monday, an arm of Rosatom, the Russian state-run nuclear power agency, offered to take Canadian uranium miner Uranium One (TSX: UUU) private. The deal values the company at $2.8 billion, or $2.86 per share. The deal is amicable... Rosatom owned more than 51% of Uranium One's shares prior to the offer. And they're partners on a major uranium mine.
This is the second major acquisition for Rosatom in the last 18 months. In June 2011, the company bought Mantra Resources for its Mkuju River project in Tanzania. Russia is clearly worried about its uranium supply. It is building nuclear facilities throughout Asia and Europe. And it's taking advantage of the low uranium prices to buy up supplies.
S&A Resource Report editor Matt Badiali wrote about the fantastic opportunity in uranium in last month's issue. Here's what he wrote:
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As ultra-successful resource investor Rick Rule, founder of Sprott Global Resource Investing, pointed out in a recent interview... When the Japanese shut down their nuclear power plants, they took 20 million pounds of demand off the market. And the decision added 15 million pounds of supply, as the country's power companies sold off their surplus fuel to generate revenue that wasn't coming from electricity.
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So that short-term drop in demand and spike in surplus supplies dumped on the market killed uranium prices over the past year. That's why we have the opportunity we do today...
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The opportunity in uranium is so promising right now that we are going to put a slate of them in the model portfolio. These companies are so beaten-down that we won't risk more than 12.5% on any of them... and our potential gains are as much as 300% if they simply recover to their pre-Fukushima prices.
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The Russians likely came to the same conclusion... and are taking advantage of the opportunity as well. The company targeted for acquisition was the same one Matt recommended in the issue. Subscribers who bought shares of Uranium One following his recommendation are up 47% on the takeover news. (Matt's other two uranium stocks are up 40% and 15% in a little more than six weeks.)
U.S. housing starts rose 12.1% in December to a seasonally adjusted rate of 954,000, according to the Commerce Department. Construction was up 36.9% from a year ago... That's the highest level since July 2008.
For full-year 2012, 780,000 new homes were started, the highest number since 2008. But starts are still below the historical average of 1.5 million new homes a year (since 1959).
The results beat expectations... Economists expected 890,000 homes (which still would have been an increase from 851,000 in November).
One beneficiary of the housing rebound is mortgage REIT Two Harbors. Steve Sjuggerud recommended the stock in the July 2011 issue of True Wealth. He calls these companies "virtual banks" because, like banks, they earn an interest-rate spread. But unlike most banks, virtual banks don't have any branches. These companies borrow money at super-low rates and invest it in higher-paying government-guaranteed mortgage bonds.
But last year, Two Harbors announced it was doing something different. As Steve wrote in the October 8 DailyWealth...
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Thomas [Siering] is the president of Two Harbors (TWO). On a recent conference call, he told listeners, "Two Harbors has invested approximately $150 million in its portfolio of single-family residential properties of roughly 1,370 homes."
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Regular readers know I think residential real estate is the most awesome investment opportunity in American history. But it's been tough for individual investors to take advantage.
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That's what's go me so excited...
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On the call Thomas said, "We continue to acquire properties in Arizona, California, Florida, Georgia, and Nevada... With home prices in some of our target markets down 50% or more from recent peak levels, we have been able to acquire properties at significant discounts to replacement cost."
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Two Harbors bought its entire $150 million portfolio this year. Importantly, TWO announced plans to "spin off" its residential real estate portfolio into a stock that only owns (and rents out) residential real estate.
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The new company will be called Silver Bay Realty Trust. Silver Bay will be entirely dedicated to purchasing, managing, and renting residential real estate. Two Harbors will own a large stake of the company. (That means you will own Silver Bay if you already own Two Harbors.)
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If you own shares of Two Harbors, not only do you receive a double-digit annual dividend... but you also have a direct play in the housing market. Two Harbors shareholders will receive a special dividend of Silver Bay shares this quarter. True Wealth readers are up 44% on Two Harbors.
New 52-week highs (as of 1/16/13): Guggenheim China Real Estate Fund (TAO), Targa Resources (TRGP), Constellation Brands (STZ), Johnson & Johnson (JNJ), Monsanto (MON), 3M (MMM), Navigators Group (NAVG), Blackstone Group (BX), Becton-Dickinson (BDX), Government Properties Income Trust (GOV), Two Harbors (TWO), and Walgreens (WAG).
Another positive note in today's mailbag... It must be the New Year. Send your e-mails to feedback@stansberryresearch.com.
"I just wanted to write in to thank all of you for the marvelous education I have received from y'all. The best thing is the synergistic effect of sucking the wisdom from all of you; each one of your letter writers have gems for me on a regular basis, and I find that the benefit is much greater than the sum of its parts.
"For example, both Porter and Dan are willing to catch a falling knife, which Steve always counsels us against; they buy when a stock has dropped so much that the value seems obvious, but sometimes they continue dropping, anyway. There are obvious opportunities in timing such a catch properly, but it can be very dangerous; and the danger is exacerbated by the trailing stops you encourage us to use if our timing is not extremely good.
"In other words, if the knife keeps falling much longer (and we all know how rational markets can be!) we are guaranteed to lose 25%. Dan does 2 things that help hedge that danger: he does a pretty good job of figuring when it is absurd for the stock price to fall much further, and it seems like he doesn't insist on fanatical observance of trailing stops (or perhaps he is just using wider ones?) in his Extreme Value newsletter. (I understand the wisdom of his being more fanatical about these stops in The 12% Letter, since us old folks can't afford big losses!)
"What I am saying is that it seems OK to buy a 'falling knife' if one is willing to hold it until the price inherent in the company is finally realized by investors. Eventually, the idiots will get it right; we just have to make sure our original thesis about and analysis of the company is correct, and to be attentive and willing to adjust to new developments.
"Also, if you guys do recommend a stock that has not carved out a pretty clear bottom (thanks, Brian) or is in an established uptrend (thanks, Steve) I have learned to either sell puts rather than buy the stock (thanks, Porter, Dave, and Jeff), protecting my downside, or to establish a half position (thanks, Frank) so I can eagerly take advantage of further drops.
"The value of the education I have received from each of you has greatly outweighed the price of the newsletters, and has become more important to me than the financial gains I have made. Add in the synergy, and it's better still!" – Paid-up subscriber Tim Schroeder
Ferris comment: Thanks for the kudos, Tim. Just a few clarifications...
I don't want to let anyone believe that I ever make judgments about share-price movements – past, present, or future – as you've suggested. I don't pay attention whatsoever to share-price movements. Instead, I focus on the quality of the business and what I believe that business is worth.
I've caught plenty of falling knives in my career, but I don't view the stock-price movement as the defining characteristic of a falling knife. A true falling knife, in my view, is a distressed business, like computer manufacturer Hewlett-Packard or bookseller Barnes & Noble.
Study businesses. Learn the value of the businesses you're buying. Learn to build positions slowly, in small pieces. Never try to make big money in little time. Do all that, and much of the negative share-price movement you're worried about should cease to be a problem.
Regards,
