Anyone who aspires to create income should learn to invest in financial markets, to diversify their assets.
Not at all easy as there are “millions” of ways to do it more or less valid.
Basically there are 2 approaches:
- Being a trader speculating on the performance of the indices (a real job because it requires constant operation and profound competence as well as an ability to control one’s emotional sphere, the latter aspect not at all easy to manage).
- Being a drawer, that is investing in a stock that has excellent fundamentals and keep it in the portfolio for years without caring more about the “whims of the market”, we focus on the goodness of the company that represents it, so we no longer worry about fluctuations in the short – medium term indexes, trusting that in the long term the stock will certainly grow, … will grow if the company is solid and operates in a sector that has growth prospects, and moreover, the stock indices generally always grow in the long term, therefore it will also grow due to.
Let’s start by making a consideration, statistics show that 90% of traders lose their money and that 80% of traders close their portfolio within 2 years. Incredible true….
This is because many people improvise; to be a trader you need to have an excellent understanding of market dynamics, of the strategy you want to apply, of portfolio management, of managing your emotional state, you understand that at this level few arrive after having failed and failed.
Anyway, I don’t even know by hearsay of traders who made millions. At the most, a valid trader can earn well, a few thousand euros a month, however, making a life that, for my nature, I consider infernal (obviously I’m expressing a subjective opinion).
Instead, it is known how some internationally renowned investors, first of all Warren Buffet and others, have managed to accumulate stellar assets by investing in the stock market based only on the analysis of company fundamentals with the Value Investing technique.
Buffet buys shares as if he were buying pieces of a company, for Buffet the stock exchange could open even once a year as he has repeatedly stated, to underline that short and medium-term fluctuations, even violent ones, do not interest him and do not care, Buffet focus on the long term by buying shares in excellent companies that earn valid dividends.
It also buys these shares in a smart way ie by selling options.
Now this is not the place to deal with options, it is a rather broad topic and for a general overview I refer you to a good free broker assistance course at the following link: Options course, … ah … I would like to emphasize that I do not take any commission from the advertising that I am doing in this course, I simply believe that it has simple and clear contents and is well structured for those who want to enter this world, I recommend it :-). Another thing that I would like to emphasize is that what I will say in the following article should not be taken as an example to set up a real operation, they are only invented examples to better explain the concepts, read the blog disclaimer, anyone who decides to actually operate it do it at your own risk.
Returning to the discussion, a powerful strategy to create a portfolio consists of buying the securities through the sale of options, the technique consists in establishing a price at which you want to buy the stock and sell a put (whoever sells a put receives a premium if the stock lateralizes or it grows, the important thing that it does not reach and holes the strike) with a strike equal to that price.
Let’s take an example: the Carnival Corporation stock is quoted at $ 20, I decide, after having done a fundamental analysis, that a fair price for the purchase is $ 17 suppose. I am selling a put on Carnival Corporation strike $ 17, expiring in one month.
Two things can happen:
The price of the share does not go down, so the stock will not be assigned to me, but unlike a conditional order in which I fix the purchase of a share when I reach $ 17, I will still earn a premium and collect money, if I had placed a conditional order I would not have collected anything.
The share price drops below $ 17, I am assigned, that is, I buy the stock (or rather 100 Carnival shares, as the option is a leveraged product and 1 option = 100 shares), at this point Carnival enters be part of the portfolio and start to receive dividends.
On this stock I can then do the reverse trick, that is to sell call options (whoever sells calls receives a premium if the stock lateralizes or falls, the important thing that it does not reach the strike by going up and exceeds it), once again an example helps us: if Carnival quotes $ 18 I can for example sell a call for $ 21 a month and if within this time frame the price of Carnival remains below $ 21 I will receive a cash prize, in the event that my position exceeds $ 21 in this case it will be liquidated and I will have made a profit of 21-17 = 4 * 100 = $ 400 (i.e. the nominal value of the share at the time of liquidation minus the share assignment price, all multiplied by 100 as we had in portfolio of 100 shares).
The undoubted advantages of this strategy are many and if statistically the advantages are more than the disadvantages, I like it:
- I’m not being a trader but I’m investing to create a dividend stock portfolio, that is a real passive income that will generate a constant cash flow; stocks over time, if they have good fundamentals, will also grow simply by inertia, as indices grow continuously over the long term.
As stock values grow, dividends will grow too (and known as Warren Buffet has been holding Cocacola for decades, now generating stellar dividends.
Cocacola was bought at 3.25 euros per share, now it detaches a dividend of 1.6 euros per share or 49%! of annual dividend !!.
- I earn even if I can’t put the stock in my portfolio because I take the premium by selling puts every time the stock does not reach the value for which I would have bought.
- I continue to earn even when I have the stock in my portfolio by selling calls, if the stock hits the strike I will be liquidated the position in profit. (Attention it is clear that the profit is generated if the strike of the call is greater than the strike of the put with which the stock was purchased, I mean that this strategy can be applied as long as it is possible to place a call whose strike is higher than the price of purchase, this is not always the case for example in the case of a strongly bear market (bearish)).
So summarizing gain:
- From the revaluation of the stock over the years.
- Because I receive continuous annual dividends.
- When I try to buy the stock by selling puts.
- When I have the stock in the portfolio by selling call.
Below we report as an example some put options sold with the aim of buying Apple (ticker AAPL) and others … As you can see, the broker tells us that we have sold (-1 in red as we sell and do not buy) an option on Apple with strike 117.5 and expiry on October 16, the current market price is therefore 119.76
- if Apple is still above the strike on October 16, we will collect the premium equal to the average unit price of option 4.06 (intermediate column) * 100 (because 1 option = 100 shares) or $ 400,
- if it falls below 117.5 we will be awarded 100 apple shares for a total of $ 11,750, so we will have bought $ 11,750 of Apple shares.
Said it seems like a lot of money, but be careful … earning is never easy, in the meantime it is necessary to know how to analyze the fundamentals of a company, follow the company earning, monitor its budgets, etc., a company could encounter problems over the years title suffer.
It is not said that dividends are detached for life from the company, it depends on the board of directors, in general there is a tendency to put in the portfolio companies that have a tradition of distributing dividends to shareholders (such as shares that are part of the Dividend Kings, o Dividend Aristocrats, companies that have been paying dividends for 50 and 20 years respectively on an ongoing basis).
Through put it is not possible to buy less than 100 shares at a time, in fact 1 option contract = 100 shares, therefore it is necessary to make a choice of the shares to be put in the portfolio based on a nominal value based on the size of the portfolio so that the thing is balanced.
For example, if I want to create a portfolio and I have $ 20,000 to invest, I will not go to sell puts on Amazon because Amazon has a very high nominal value of the share: 1 share = $ 3182 so in the event I was assigned I would have to pay $ 318,270! !, I have to choose shares with a nominal value that I can afford! …
Lastly (or perhaps it would be better to say first) what risks do I run?, … well certainly I must not be overexposed because in the event that I was assigned to several positions at the same time I could run the risk of not having the liquidity to cover the assignment, but here we enter a territory that is essential to understand when working with derivatives in general, which is the concept of margin and portfolio management on which books have been written and this is not the place to address this very delicate issue.
The goal of this article was to share and inform about a strategy that I consider extremely interesting for creating a dividend portfolio, that is, a passive cashflow income alternative to what may be the purchase of one or more properties to be rented.
If you are interested in the operation, you can write to me and, without obligation, I can recommend a person who organizes courses on strategy.
If you liked the article and you have a blog on a site, I would be grateful if you could insert it as a link and include it on your pages, or simply share the link on your favorite social media! at least that my effort is not in vain… Thank you!… let’s spread the good information if it can help others to grow ;-).