Investing in dividend-paying stocks is a time-tested strategy for getting wealthy faster than your neighbors. Money rolls in like clockwork, and if you reinvest those dividends, your financial future is all but set.
But can you go one step further and magnify your gains?
The answer is a resounding “YES!” – and you can find the secret in the options markets.
When I first began trading options, they expired on a quarterly schedule. Now you can trade options that expire daily, weekly, monthly, quarterly and annually. There’s an option for every investor and every strategy. And if you take advantage of this timing, you can collect “extra dividends” from the stocks you already own.
But there are rules to follow…
Claiming your “extra dividend” relies on covered call investing. This is when you sell an option against the shares you already own.
The term “covered” refers to the fact that you already own the shares. It is the least risky options strategy for your brokerage firm since it has nothing at risk, and it is a conservative strategy for investors as well. It’s allowed in every type of account and requires the absolute lowest level of options permission. In other words, everyone gets approved for this strategy.
I’ve seen this strategy in action, and it does not disappoint. Back in the late ’90s, I developed a deep-in-the-money covered call system that delivered a track record of 80%-plus winners for years. I used the same methodology to launch my very successful Automatic Trading Millionaire service.
Here’s how the monthly “extra dividend” works. (If your stock does not offer options that trade monthly, you can adapt this strategy to a quarterly system.)
Each month, you will sell an option against the shares that you own. Because options trade in contracts that each represent 100 shares, you will need to own at least 100 shares to make the trade.
The steps are as follows.
- Get permission to trade options by contacting your broker. Make sure you tell the broker you want to trade covered calls.
- Next, pull up an options chain. The options chain is a table that displays all options available for your stock sorted by strike price and expiration date. “Strike price” refers to the price at which you can buy or sell the underlying shares.
- Pick a price at which you would be willing to sell your shares. This is the most important aspect of the trade. If you don’t have a firm target price, the system will not work. Selling stocks is as much of a discipline as buying them. If you never want to sell your stock, then this system won’t work for you either.
- Once you’ve picked a price, sell an option with that strike price against your shares. By selling the option, you will immediately receive a cash payment that is yours to keep no matter what.
- In exchange for that cash payment, you obligate yourself to sell your shares should the stock reach the strike price that you chose.
- If the stock closes at or above that strike price at expiration, your shares will automatically be taken out of your account. So the less willing you are to sell your shares, the higher the strike price you should choose.
For example, let’s say that AT&T (NYSE: T) is trading at $32. You could choose to be a seller of AT&T at $35. You would pull up the options chain for AT&T and pick the ones with $35 strike price expirations. Choose whether you want a weekly, monthly or another expiration period… and enter the trade.
You would SELL to OPEN a specified number of contracts (the number of shares you own divided by 100) of AT&T.
The money comes in immediately, and if AT&T does not close at or above $35, you keep the cash and your stock – raking in a full extra dividend and accelerating your wealth building.
At expiration… rinse and repeat!