Saturday, September 12, 2009

The safe way to make money in the stock market

If you ever wanted to take advantage of dividend paying stocks, but didn’t because you were afraid of the potential decline in stock prices, resulting in net loss, then this strategy is for you.

The strategy is very simple and straight forward, and you can set it and forget it. I am going to give you the strategy, step by step. I will even suggest some of the best stocks and etf’s to use with this strategy. If you follow the instructions, and apply due dilligence, you should achieve positive results. Remember, though, that there is no such thing as a guarentee when investing, and you must accept responsibility for your own success or failure. Having said that, once you read through the strategy, you will see that the odds are tremendously in your favor with this game plan.

You will need to open an account for buying stocks. You will also need to apply for basic option priveleges. I recommend TD Ameritrade, it’s the company I personally use. They offer great service, a great platform to work from, and they will grant you the privelege of selling covered calls without any hassle. You can easily access all the information needed to do this simple, easy business. I am not affiliated with TD Ameritrade, but I recommend them because I know you can get started quickly and you will be happy if you use them.

Now, I will outline the strategy that captures dividends, and protects you from losses when stock prices go down. I suggest you start with a modest amount of capital, follow the steps, and get a feel for this strategy and see how it works. Once you get comfortable with it, you will probably want to get more aggressive. This is espescially true if you are a rookie investor. If the term covered call is not familiar to you, you should take a few minutes to google it, it’s really not a complicated thing to learn.

1.) Establish a covered call position (or multiple covered calls) with a high quality stock. For every 100 shares of stock you buy, you can sell a call. Use only half of the amount you have to invest, or slightly more (if you are like me you will keep slightly more weight on the bullish side), and you will be using the other half for step 2. If you are using TD Ameritrade, you will only pay one commission if you buy the shares and sell the calls at the same time. If you already own stocks and wish the apply this strategy, you will need to pay the inexpensive commision to sell calls against the shares. Personally, I like to sell a call that is between 2 and 4 weeks from expiration, with a strike price that is a minimum of 2 strike prices above current market price. Note: the revenue you create with the sale of the call, along with your dividends, will be yours to keep! What stock should you use? I like MO, MCD, JNJ, KO, PEP and PAS. These are blue chip stocks, the companies that are the most likely to be around forever. They also have price stability, which makes for a relaxing investment, espescially with the insurance that comes from step 2. Google nifty fifty for more blue chip symbols. For higher dividends, consider using LFB, PCL, or RYN. At the highest end of the dividend scale, there are MLP’s such as ETP, DMLP, TNH, and VLI. These have tax consequences, so be aware of this and do your homework if you go this route. REIT’s also pay big dividends but be warned that many of them are in trouble right now, and we don’t want to apply this strategy to companies that may go out of business. The goal is to collect dividends and premiums (from covered calls), and avoid huge swings in account equity. This is a long term strategy, and if you stick with it, you will be generating excellent cash flow with it.

2.) Establish a second covered call (or multiple covered calls) with a bear market etf. Do not use a leveraged bear market etf. I suggest you use SDS or QID, these are the ones that work for me. Other choices include PSQ, DOG, SH, MYY, SBB, RWM, DXD, MZZ, SDD, TWM, SJF, SFK. a little research will yield alot of choices. I like SDS and QID, because they trade inversely of the major indices. There are others you can use, research bear market etf’s for more ideas.

You are set up for now. Once you complete steps 1 & 2, you can sit back and relax. When the market is up, your blue chips will be making money, while the bear market etf’s are losing money. When the market is down, the opposite is true. In the early going, you may want to tweak the position in an effort to keep as neutral as possible. I like to keep slightly more weight on the bullish side, using step 2 for disaster proof insurance. In the fall of 2008, when most investors lost big bucks in their 401k plans, my strategy kept me safe, as I did not incur any huge loss. This is what I hope for you to achieve. Now, there is sometimes a step 3.

3.) Mark dividend pay dates on your calendar. You also want to pay attention to expiration day for the calls you sold, mark the calendar for these as well. If the call expires worthless, then you will sell another one (or multiple calls) in the new front month. If the call expires in the money, you will be taking profits on your position, and you will need to repeat step one. Your profit on this is the amount collected from selling your shares at the strike price of the call, plus the premiums from the call, plus the dividends, minus the price of the stocks and brokerage commission. Most stocks have 4 or 5 option expiry months to work with, which means you can generate cash from selling calls 4 or 5 times a year (quarterly). This is also true of dividends. For those of you who want to build a machine that spits out big bucks, go to step 4.

4.) Take dividends and money from selling your calls and plow it into more shares. More shares means more income. Keep slightly more weight on the bullish side, but don’t neglect to increase your insurance proportionately. This is important if you want your savings and ivestments to be crash proof. Pay attention to record dates, you want to purchase shares 3 business days before the record date to get the dividends. Group your share purchases as much as possible, to minimize commission effects. The larger the number of shares you buy at a time, the less the commission per share is. If you are using TD Ameritrade, and set up electronic deposits/withdrawals for your account, funds are available for investing the next business day after completing a deposit or withdrawal request, typically.

So, there it is, all in a nut shell. This is not a get rich quick scheme, but if you apply this strategy and put just a little work into it, you can grow your income quite nicely. This is espescially true if you regularly add to your positions on pay days. Early retirement should now be a realistic goal for you!