Introduction to Landlording (Covered Calls)

Ever thought it would be nice to find a way to collect more than the basic annual 3% dividend? What if I told you there was a way to easily collect that 3% dividend EACH MONTH rather than yearly. What if I also told you that there is no more risk in doing this than owning a stock. Well there is and this strategy is called COVERED CALLS. In a nutshell you rent your stock to somebody for 2%-10% PER MONTH. My name is Chris and I am the LANDLORD.

I rent my stocks out in a strategy so safe that even the IRS let's you do these trades INSIDE your IRA. Here is technical definition of a Covered Call (also known as a buy-write):
A call option position in which the writer owns the number of shares of the underlying stock represented by the option contracts. Covered calls generally limit the risk the writer takes because the stock does not have to be bought at the market price, if the holder of that option decides to exercise it.

Okay now for the real life scenerio. Here is one that I did just last week:

Stock ABC is trading at $22 a share. I buy 100 shares of that stock for $2200. (actually I have about $1 in commission for this trade but we will leave out commissions for now). I then go to any stock source and look up ABC stock options and see at what price the calls are selling. For this particular stock the May Call Expiration (always expiring the 3rd Friday of each month) was selling for $2 at a strike of $24. In other words somebody is willing to pay me $2 for each of my shares that I bought at $22 for the right to buy this stock from me in the next 4 weeks at a price of $24. Here now are the possible outcomes:

Stock closes on strike day @ above $24 - Buyer pays me $2400 for my 100 shares (remember I still keep the original option premium of $200 on top of this). Net return of almost 20% in one month.

Stock closes on strike day @ $24 or less. Buyer doesn't want to buy my stock so they let the option expire worthless and I keep the $200 premium and write a new option the next month.
In my opinion both cases are a win-win situation. So what is the downside? Well if the bottom falls out of the stock over the next 4 weeks you still own the stock. In my opinion I would own the stock anyways so why not get the option premium!

Covered Calls have allowed me to retire early at the ripe old age of 39. For no other reason than I enjoy the subject I am writing this blog and I am going to post all my trades as close to real time as possible (usually within 5 minutes). Follow along as we play "landlord" to the stock market.

CYA - This blog and all stocks discussed here are for discussions purposes only. Option Trading is an advanced investment tool and should only be used by experienced investors. Do you own due diligence and consult your financial advisor before making any trades.
Happy Trading,
The Landlord

Close Out - 4/30/09 - AKAM

Closed out my Position in AKAM today with a buy back of my Naked Put for 10 cents. 3 days made $100.....not bad.

Trade - 4/28/09 - ADP

STO (3) Naked Put - ADP May 09 @ $34 for $1.05 each. Net Premium $313

Looking for another good ancher for the trading portfolio and decided on this one. ADP has paid and increased dividends for over 25 years. At this price it is already almost a 4% dividend. This is one that I really hope gets put to me.

Trade - 4/27/09 - VZ

STO (3) Naked Put - VZ May 09 @ $30 for $0.75 each. Net Premium $224

Verizon has been good to me that last 6 months but I got called out of my positions about 2 months ago. Good 6% dividend so I am going to guy on weakness this morning. They came out with earnings today and they were pretty much in line with estimates. I like them long term for their safety.

Trade - 4/27/09 - AKAM

STO (1) Naked Put - AKAM May 09 @ $19 for $1.10 each. Net Premium $110

This is a stock that I used to watch quite a bit and I am familiar with the company but they fell off my radar a year or two ago. I have to give credit where credit is due. I got this idea today from Jeff whose blog site is buywrite.wordpress.com Thanks Jeff!

I am starting with only 1 position but after earnings release in a couple of days I may add more.

Close Outs - 4/24/09 - IR, EMR, CAT, BP

I closed out the following NPs today - IR, EMR, CAT, BP and all were closed out for between 5 - 20% of original sales price.

"Pigs get fat but Hogs get slaughtered". I closed these out because the trading portfolio is up 9.9% since April 15th. After a 29% gain the previous month (these are unannualized numbers) it was time to book some profits and be ready for a pull back. I don't try to time the market but I also believe that the last dime of any CC is the hardest to earn, therefore if I can remove the risk and free up capital I will buy back. Also, now that I use IB for brokerage I have almost eliminated the brokerage costs. For example I bought back 2 contracts of IR today at 9 cents and the commission was $1.

Trade - 4/21/09 - MS

STO (2) Naked Put - MS May 09 @ $22 for $1.40 each. Net Premium $279

Trade - 4/21/09 - KO

STO (1) Naked Put - KO May 09 @ $42.50 for $1.30 each. Net Premium $129.

I collect $129 on this one and if I get put I will be in KO for $41.21 with a 4% dividend yield!

Trade - 4/20/09 - CAT

STO (2) Naked Put - CAT May 09 @ $30 for $2.18 each. Net Premium $435.

Trade - 4/20/09 - BP

STO (1) Naked Put - BP May 09 @ $39 for $1.91 each. Net Premium $190.

Trade - 4/20/09 - PEP

STO (1) Naked Put - PEP May 09 @ $50 for $1.45 each. Net Premium $144

Trade - 4/20/09 - BBT

STO (3) Naked Put - BBT May 09 @ $17.50 for $1.30 each. Net Premium $388.

Are we in a bear rally? I still think so but I am now on the fence so I am taking advantage of the 200 Dow pull back today.

Trade - 4/20/09 - V

STO (2) Naked Put - V May 09 @ $52.50 for $1.60 each. Net Premium $319.

Trade - 4/16/09 - WMT

STO (1) Naked Put - WMT May 09 @ $50 for $1.83 each. Net Premium $182.

While I still believe we are in a bear rally and not a bull market I also believe we are forming alot of support around DOW 7900-8000 and may move sideways all year at this level. I am trying to get my trading account to less than 50% cash on the sidelines by investing in SOLID companies with Great balance sheets. I was pushing 90% cash position just 2 weeks ago. I also want to keep enough cash in case we go down to 7000 DOW again.

Trade - 4/16/09 - JPM

STO (2) Naked Put - JPM May 09 @ $30 for $1.90 each. Net Premium $359. Downside protection with the premium collected is 15% (down to $28.10).

Trade - 4/15/09 - MCD

STO (1) Naked Put - MCD May 09 @ $50 for $0.86 each. Net Premium $85.

If I get put on this one it will be at a 4% dividend on a ver safe company. Also appears that I can get about 2% each month in CC premium (at least this month anyways).

Trade - 4/14/09 - IR

STO (2) Naked Puts - IR May 09 @ $15 for $0.90 each. Net Premium $179.

Ingersol Rand is a play on the turn around in on the economy. If I get put I will be in it for $14.10 (over a 10% discount from current price) and have a dividend of over 5% at that price from a solid company.

REMEMBER: A naked put is a synthetic covered call. The RESULTS will yield the same return. THE BIG DIFFERENCE is that my cost of capital on a naked put is ZERO. In other words I have nothing invested in this trade and I collect my premium immediately. If I did a covered call on this I would have to invest $3000+ in the stock first. Since I trade in a NON-retirement account I have margin enabled. I don't use it to buy stocks but it basicly sits there at no cost and allows me to do naked puts to move into purchase positions to later do covered calls. I am doing more NPs right now because I am in a high cash position because most of my CCs have been called between last month and this Friday.

Trade - 4/14/09 - GE

STO (2) CCs of GE May 09 at $14 for $0.48 each - Net Premium Collected $95

After alot of work I finally have my basis of GE down under $11. I am going to take this opportunity to collect a 4% premium on these shares for 1 month out.

Trade - 4/14/09 - EMR

STO (2) NPs of EMR (Emerson Electric) - May 2009 @ $29 for $0.95 each . Total net Premium $189.

Emerson Electric has been really good to me over the past several months. I own 100 shares and would like to increase that position. If I get put I will be in the company for $28.05. If I own at this level it would put the dividend at 4.7%.

Trade - 4/13/09 - BBT

STO (3) Covered Calls - BBT May 09 @ $25 for $0.50 each. Net Premium $144

BBT has had a nice run up. I originally bought my 300 shares at $27.50 but through selling CCs and NPs my basis is now less than $20. This CC strike at $25 will be 20% above todays price and still give me a premium of 2.4% this month so I am going to go ahead and take it. Additionally I have already captured the $0.47 dividend this month for another 2% this month.

I can't believe how much I like covered calls. That is 4.4% for 1 month!

Trade - 4/13/09 - INTC

STO (2) Naked Puts INTC- May 2009 @ $15 for $0.73 each - Total Income - $145

I am sitting at about 85% cash in my options trading account now and I want to start moving more into the market just in case this isn't a bear rally. I am not bullish on Intel but I believe they are stable. If I get put I will be in it for $14.23 per share which also puts me at a 4% dividend on intel. It also appears that I should be able to then write some nice covered calls in the 3-5% per month premium range.

Trade Update - 4/9/09

I have switched my accout to interactivebrokers.com and I must say I am impressed. The site is slightly more complex than tradeking but that is only because it offers so much more.

I am taking this opportunity to close out most of my tradeking positions with the Dow well over 8000 today. Most all of my naked puts are only trading for pennies on the dollar so it is a good time to close them out. This has been my best month ever in my options trading account. I am up 20+ % since early March (240% annualized - cya: this is not typical). I continue to refine my trading process and I am now in the process of writing a trading plan. When completed I will post it here.