• June 30, 2022

A Triple Dipper: How to Get 3 Profits in 1 Stock Trade

This is a fairly simple strategy that I’m sure many experienced traders are very familiar with, possibly under some other name I’m not familiar with. I wanted to write about it because I don’t see anyone talking about it anymore. Since the great days of day trading and of course the bursting of the internet bubble of 2000, there seems to be a lack of patience that this strategy needs to work.

A lot of people seem to be coming back to the markets since the crashes of 2000. If you were one of those who re-joined during the early part of 2004, you made big gains. But now it seems that there are quite a few Wall Street insiders who are starting to raise the flag of “irrational exuberance” once again. If you’ve been looking at some of the unrealistic gains in the recent big fliers, you may be looking for a slightly more conservative way to be in the market.

In the early 1970s I met a young Dean Witter Reynolds broker and told him I had some dollars I wanted to put into the stock market. The first thing he told me was that, unless I had $100,000, I wanted to invest one time in a diversified portfolio with a buy and hold strategy…or…$10,000 that I wanted to invest in a more aggressive “trade” strategy, I wasn’t interested in my account. Keep in mind that this was a long time before the day trading craze hit. I was impressed by his direct and honest approach. However, he didn’t have $100,000 back then, but he did have a little over $10,000. With that we went to the races, and this is the business plan he put to work for me.

First of all, he stayed away from the flyers entirely. A series of strong, high-quality companies followed that had an above-average dividend payout history, but still had some volatility. Both dividend and volatility are necessary ingredients.

We buy six to ten positions with an average of 300-500 shares in each position. Every stock we bought paid a higher-than-average dividend. We did well with companies like Phillip Morris [MO]American Electric and Energy [AEP]Battle Mountain Gold Co. [now a pink sheeter]general motors [GM] And some others. I only mention them so that those who are crazy about research (exactly the kind of thing I would do) can go back and see the kind of movement we had in these stocks in those days. There were others, of course, but that will give you some research fodder. GM and MO may still work these days, but I haven’t looked at AEP in years and of course Battle Mountain is history.

Well, now you know what kind of companies we are looking for; solid companies that pay higher than average dividends with a bit of volatility. Hey, I never said this was easy! But to make it even more challenging, we need one more component to do the money triple dip: options. To be more specific, we only need covered calls! Let me repeat that, we only sell covered calls, there are no other options. You will need to be approved by your broker for options trading and you will need a margin account.

This is how the play is made. You buy 300-500 shares of a stock that will pay dividends in the next 15-45 days. You sell the 30- to 60-day covered call by taking the premium money and providing that amount of loss protection money to offset any movement against you.

The ideal trade will develop like this. You’ll buy the stock, pay the dividend while you own it, sell the covered call for the option premium money, and hopefully the stock will settle at the strike price. Obviously, you want to make sure that you only sell the call with a strike price higher than your entry price.

Now let’s apply the math on a hypothetical operation. Let’s say you buy MO at $50 and are paying a dividend of $0.25 and the $51 call option is sold at $0.25 with an expiration date within 45 days. Let’s further assume that the stock pays the dividend and moves above the strike price of $51 on the expiration date and is canceled. You will earn $.25 on the dividend, $.25 on the premium money on the call, and $1.00 on the stock position itself for a total profit of $1.50 on 300 shares. That’s $300 on a $7,500 investment (using a 2:1 margin account) for a 24% annualized return on your money. More on the math: $300 divided by $7,500 = 4% X 8 = 24%. Keep in mind that you made $300 in 45 days, which means you can theoretically do it 8 times a year. This is how you get the 24% annualized return. Not shabby! (Because fees vary, I haven’t factored them into the equation, which you’ll obviously have to do.)

Seems pretty easy, doesn’t it? Well, it is, when it works. But like everything in the stock market (or in life itself) nothing is certain.

Any number of things can happen. Here are just a couple of things to consider. First of all, I would check what all the analysts are saying about any stock I am about to try this on. Make sure the company has a strong dividend history. I also caution you not to play a stock that is due to report earnings while you are in the options period. Also keep in mind that as a general rule a share will drop in direct relation to the split payout.

Obviously, this strategy will not always play out the way our hypothetical trade did. However, I’ve had results similar to that, as well as some much better ones, and “yes”, some that didn’t work at all. What makes the play less risky than the stand-alone buy-and-hold trade is that no matter what the stock does, you get the dividend and the options premium money gives you so much downside protection in one move. against him.

I had a number of shares that I would keep in my account and just reinvest the option money and collect the dividend on a regular basis, with two scoops, and I was very happy that the shares were not cancelled.

I was very lucky to have met a broker who became one of my best friends and taught me this method of investing. I strongly suggest that you seek the advice of a professional broker; money manager; his lawyer; his accountant; your present, past or future wife or husband; your doctor; his heirs, his auto mechanic, or anyone else in the world you can think of before trying this or any investment method. (Okay, I think that covers everyone.)

For more information on writing covered calls, check out the resources at http://www.TraderAide.com. Good luck and happy trading!

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