Income traders have gotten a big raise this month…
One of the world’s greatest income strategies is using the options market to collect “instant income” on high-quality stocks. You do that by selling naked puts and writing covered calls.
If you focus on the right setups, you can use this strategy to generate solid income (6%-12% yields) all year round. But sometimes it gets a heck of a lot more profitable…
That’s when the Volatility Index (or “VIX”) is elevated.
When the stock market gets shaky – as it has over the past two months – people are willing to pay a lot more for portfolio insurance.
That means people who are willing to sell options (income traders) get paid a lot more.
As you can see in the chart below, the “pay scale” has gotten a big boost.
The VIX has broken out above the 20 level and is now trading about 30% higher than its average over the last five months.
You still need to be extremely picky about which stocks you use to generate income. But even on the world’s safest stocks, you can now earn an enormous annual yield…
For example, you can buy a big, cheap, safe stock like Microsoft, sell covered calls against it, and collect an income stream seven times as high as the annual dividend alone.
As our colleague Dan Ferris notes, Microsoft is a “World Dominating Dividend Grower.”
If you take its tremendous cash hoard into account, you see it trades for less than seven times free cash flow.
That’s incredibly cheap.
Sure, Microsoft’s big growth days are behind it, but when you’re generating income with covered calls, you don’t need the stock to grow.
You see, when you sell covered calls, you collect cash upfront for agreeing to sell your shares for a higher price later. You give up some of your potential capital gains for guaranteed income and added safety. (You can read more about how the strategy works here.)
You should know: this strategy isn’t for gamblers reaching for the moon. This is for folks interested in a safe 10%-20% return in a year.
And you can do exactly that with Microsoft…
Right now, you can buy Microsoft for around $29 per share. You can then sell the July 30 calls for $0.75. That produces an instant “yield” of 2.6% ($0.75 divided by $29) and protects you down to $28.25 per share.
The calls expire in July, two months from now. Once they expire, you can do it all over again. So you can figure a rough annual return on this strategy of about 16%. Add in the annual 2.7% dividend, and your yield is over 18%.
The downside of a rising VIX, of course, is that the broad market is wobbling. But sticking with high-quality stocks like Microsoft will keep your capital safe… and allow you to “make hay” while the sun is shining on income traders.
Amber Lee Mason and Brian Hunt
P.S. “Trading for income” strategies are a cornerstone of our new DailyWealth Trader service. And we’ve created an exclusive video to show you the best ways to put them to work. It walks you step by step through our “greatest wealth secret.” You can view it free here.
Source: The Growth Stock Wire