As baby boomers, many retired or close to it, we all endeavor to make enough money to live on. But how about more? How about money to play with too? Former U.S. Air Force financial analyst Keith Hicks has a strategy for that. BoomerCafé doesn’t endorse any financial advice, but if it seems that it might be helpful, we don’t mind passing it along.
Maybe you’re like millions of baby boomers with a lifetime of savings and investing behind you, and now you’d like to turn that nest egg into steady income. Have you thought about stock options? Yes, those so called “risky” market thingies. Please hear me out.
Most boomers understand collecting dividends as a way of generating income. What about this as a strategy? Sell a “put” option on a stock that pays a dividend that you’d also like to own. For example, you like XYZ because of the 4.5% dividend. It currently trades at $64. You could buy it now, but hope the price drops to $60. Why not sell a $60 “put” and see what happens? The money that you get for selling the option will be immediately deposited into your brokerage account.
If the stock drops, you buy it at a bargain, plus keep the “put” income. If the stock doesn’t drop to $60 by expiration, you don’t buy the stock, but you keep the income anyway. So no matter what, income is coming into your account. Word of caution here: pick well established companies (most dividend payers are). You wouldn’t do this with a penny stock as you may be assigned the stock only to watch it go to zero.
So now you either own the stock or you don’t. Let’s say you own it. You can wait for the stock to rise in price and then sell a “call” option. Back to XYZ: you bought it at $60 by selling a “put” option. Let’s say six months later the stock price rises back to $64. Lucky you, you’ve collected dividends along the way, but even better is that you can now sell a $65 “call” option. At expiration if the stock is above $65, you must sell your stock at $65, thus locking in a $5 profit, plus you brought in income from the “call” option. If the price is not above $65, you keep the stock, you keep the “call” option income, and you get another opportunity to sell another call option for even more money.
So, there are really four income streams at play here: collecting “put” option income, collecting dividends, collecting “call” option income, and collecting capital gains on the sold stock. This is more profitable than just buying a bucket of stocks and waiting for the next dividend check.
My experience working this type of strategy has returned 15.3% per stock, with each trade from start to finish lasting about four-and-a-half months. This turns out to be 39% on an annualized basis, which is much better than that 4-5% dividend check. And the best part about it is, I’ve never had a losing trade. Ever.
Use that extra money to enjoy your boomer life! Have some fun. I use this strategy to generate additional travel funds. Last year my wife and I flew first class to Germany and Australia, and this year we have first class tickets booked for China.