Income traders who want new ways to capitalize on options selling tactics to get more income in less time – with less hassle – will enjoy today’s Case Study as part of Filthy Rich, Dirt Poor.
In this case study: How we turn a stock paying a 3.3% ANNUAL dividend income into a stock that could pay us 3.4% MONTHLY income. Same stock, faster income generation.
It’s called the Monthly Cash Raid.
For those of you who are not familiar with our program Perpetual Income, we aim to enhance the income from dividend stocks by selling options to collect premium, while also benefiting from capital appreciation.
For instance, we might purchase shares of a fundamentally solid company with a 4% to 6% annual dividend yield and sell calls against those shares to generate additional income. If our shares get called away, we’ll likely look to sell put options until we get assigned shares and then return to selling covered calls.
This strategy allows us to turn a modest-yield dividend stock into a 20% to 30% annual income generator by selling weekly options.
For a quick idea of return potential, here’s a sampling of eight stocks from our 2023 portfolio. Net income for the year was $12,622 on $54,000 in capital, or a 23% return on capital for the year.
The core philosophy behind the Perpetual Income strategy:
- Collect dividends from higher-yield stocks
- Sell weekly put and call options on those stocks
- Capture potential appreciation on those stocks
But, we’ve also discovered more great companies that only offer monthly options, which requires more patience on the income-generating side.
If you have patience, this new strategy, which we’ve just introduced in the Perpetual Income program, could be a significant income booster for you.
The Monthly Cash Raid
GOALGoal: Target higher-yielding stocks with monthly options, using a buy-write + dividend strategy. (Buy shares to collect the dividend, and sell a covered call).
Cash Raid trades are designed as “one-off” trades, where we buy the stock to earn the dividend and sell a covered call with the intent of being called out at a per-share gain.
It’s not a strategy we want to use every single month on these stocks. Instead, we focus it around quarterly dividend payouts, thus limiting our exposure to the stock while potentially generating much higher returns in shorter time periods.
Our first Monthly Cash Raid trade was on Iron Mountain (IRM).
Founded in 1951, Iron Mountain’s original business was the storage of documents and papers in enormous warehouses for commercial companies and government agencies. The business evolved in the 1990s and 2000s to include the scanning of documents as part of the storage process. By 2010, the company began moving into the electronic data storage business to compete with much larger companies.
IRM’s stock price is up nearly 60% over the past year, and we have been test-trading it for the past six months as a potential income play.
On March 13, we purchased shares at $80.33, one day before the stock was scheduled to go ex-dividend with a $0.65 per-share payout. But we didn’t settle for just that dividend.
Instead, we sold an in-the-money IRM 19 Apr 80 call, collecting a rich premium of $2.38, or $238 per contract. This lowered our cost basis on shares to $77.95 ($80.33 purchase price minus $2.38 call premium).
If our IRM shares get called away on or before April 19 at $80 per share, we’ll have a profit of $2.70 per contract ($2.05 difference between our cost basis and where we get called out plus the $0.65 dividend).
That’s a 3.4% return on our initial capital outlay in 37 days or less versus the 3.3% yield the stock pays annually.
