Jun
Show Me the Money: Covered Calls & Naked Puts for a Monthly Cash Income
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Ronald Groenke rightfully stresses the importance of cash flow but he understates the risks involved. This is a book written for option beginners and, as such, a little more emphasis on the risk involved would be appropriate. The book is mostly about covered calls and while there is not much additional risk in selling covered calls there is an important trade-off that should be considered. When you sell covered calls you give up the possibility of a Peter Lynch style multi-bagger replacing it with an income stream.
There is not much discussion about selling naked puts but if they are suggested it should be made clear that they are a lot more risky than covered calls. The first caveat is that unless you are called Warren Buffett you have secure the puts. The puts are “naked” in that they are not covered by stock short sales but they are secured with cash or margin. On page 54 Groenke says: “And you get paid up front when you sell a Call or a Put. That money is yours no matter what.” This not true for puts, the premium you get plus another amount is retained by the broker as a guarantee against being assigned. If assigned, that money goes to pay the shares you are buying.
Groenke also overstates the income you get from the puts. In effect he ignores the amount of money you put at risk when selling the naked put which is the strike price less the premium you receive. From page 43: Jake asks “With Career Education you sold numerous Puts and they expired. How would you computer your return on that?” to which Graham replies: “Perhaps with the potential investment of an assigned put.” That is the correct answer but that is not how he computes the rates of return on the puts. On page 45 there is the case for Plexus which shows a gain of 9.96% based on .604.50 invested in 800 shares at .00. But the total amount of money put at risk is .604.50 for the shares and ,462.02 for the puts, ,000 strike less 7.98 premium received. Using ,066.52 as your base, the return is only 4.84%. My calculation assumes that the stock goes to zero and while that is not likely, had you invested in Lehman Bros. or Enron, well…
I bought the book because I too like selling covered calls and cash (margin) secured naked puts. Frankly the story of Jake and his professor is a bit corny but don’t let that put you off, it helps pace the real stuff. One reviewer complained that the book is really an infomercial, which it is. One of the big difficulties in investing is finding stocks to invest in, one should have an inventory of potential candidates. If the software Groenke has for sale, which I have not tested, lives up to what he claims for it, then it makes a lot of sense for him to offer that software and explain what it does. A lot of books are long on theory and short on practice. Show Me the Money is short on theory but, with the help of the software, long on practicality.
As a closing comment, if you are going to sell naked puts, make sure not to overextend your margin, the money you got for the puts has not been earned until either the puts are bought back or they expire worthless.
Show Me the Money: Covered Calls & Naked Puts for a Monthly Cash Income Feature
- ISBN13: 9781934002087
- Condition: NEW
- Notes: Brand New from Publisher. No Remainder Mark.
Show Me the Money: Covered Calls & Naked Puts for a Monthly Cash Income Overview
Are you leaving Cash on the table?
As an investor you have stocks in your portfolio. Those stocks, individually, will go up, down or remain about the same. Nothing really you can do about that. Market forces and corporate actions beyond your control will cause fluctuations in the value of your holdings.
But……
There is one important action you can take that will put cash in your brokerage account, today and month after month as time rolls by.
Selling Covered Calls and Naked Puts is a stock market strategy favored by many savvy investors. Here s how it works. Take one of your stocks, Stock ABC, which has a market price of . If you will agree to sell that stock (a Call option) for on the third Friday of next month the market will pay you X amount of dollars today (the option premium). That s the money that you are currently leaving on the table. The premium X varies by stock and typically is two to three percent of the stock price.
Think about what can happen when you sell the option. Only one of two things will happen. If the stock price of ABC is above on the third Friday you sell it for . That will happen about 30% of the time. The other possibility is that ABC is selling for or less on the third Friday. In that case the option expires and you can sell another Call.
Either way the option premium Real Cash Money is in your brokerage account ready to be spent or reinvested.
Continue the process month after month for a constant cash income from your portfolio.
The Naked Put strategy also gives you immediate cash. Using the same example with Stock ABC, which is in your portfolio and has a market price of , if you agree to buy additional shares at a discounted price of .50 on the third Friday of next month (a Put option) the market will pay you Y amount of dollars today (the option premium). If the stock price is above .50 on the third Friday the option expires and you can sell another Put, generating more cash income. If the price does dip below .50 then you buy the additional shares and can now sell more Covered Calls. The put premium Y varies by stock and typically is one to three percent of the stock price.
This book will give you the basic skills to master the art of selling Covered Calls and Naked Puts.
Ron Groenke has developed software based on the investment concepts in his books. A free 21-day trial is available at RonGroenke.com
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