Income trades are the heart of our long term wealth building strategy. This strategy straddles the Moderate and Low Risk categories in the investment pyramid, by trading blue chips and growth stocks. We include covered calls to add more to our balance sheet on a regular basis, using a trend following strategy.
We are going to analyze the ACOR income trade, so that we can clear up a few questions fielded over the past couple of weeks. The trade was taken on February 24.
We took the trade to generate a potential $2,600 in premium. We sold 10 contracts of ACOR 2017 17-MAR 26.00 CALL, anticipating that the stock would rise before expiration, ultimately garnering a profit of $3,700. This trade also gave us 10.4% worth of downside protection for our stock, an important consideration.
- Premium received: $2,600
- Potential Profit if ACOR moved above its strike: $3,700
- Downside Protection: 10.4%
Last week we decided to roll one half of our position to the 30 strike anticipating ACOR would move higher. We let the other half expire with the stock trading 26.85, at the close to show you the result. We had a profit, so it serves its purpose.
The shares were called away on Friday, as the 26 strike was (ITM) in the money.
Since we rolled half, the following figures reflect the difference. The shares gained +1.40 and were called away at 26.00.
- Premium $1,134.91 after commissions
- Gain on 500 shares $676.10
- Total gain $1,811.91 after commissions
Not all income trades execute as planned, so we need to monitor the position. We adjust as necessary, making a note of our break even point.
If we take stocks in an uptrend that show a flat to slightly rising MACD, our chances of success are good to high. If the equity markets are flat or trending bullish, this increases the probability of a favorable outcome. Finally, if the sector the stock trades in is also moving higher, we compound our probabilities.
If a trade starts to move against us, we watch our break even point, just as we would a stop. Hit the stop we exit. The same goes for our break even. Your breakeven is the cost of the position (shares x cost per share) minus the premium received. You can also buy protective puts.
Considering the above, it is easy to see why we favor trading blue chips and growth stocks. Adding covered calls is a straight forward method of achieving our goals of financial independence. Consult with you financial advisor to see if this strategy is suitable for your circumstance.
The trades we have currently, provide a consistent and reliable income stream.
If everything goes as planned, we will bank $5440.10 in premium for this month, utilizing a larger portion of our investment capital, using our investment pyramid as a guide. Returns on the far right are monthly, but do fluctuate month to month. Annualized returns can easily be calculated.
I hope this helps clear up some of the questions you have about this strategy.
Disclaimer: Do your Own Research
Our content is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making any investment based on your own personal circumstances. You should take independent financial advice from a professional in connection with, or independently research and verify, any information that you find on our Website and wish to rely upon, whether for the purpose of making an investment decision or otherwise.
We would like to draw your attention to the following important investment warnings. The value of shares and investments and the income derived from them can go down as well as up; Investors may not get back the amount they invested – losing one’s shirt is a real risk; past performance is not a guide to future performance.