Sometimes Money Does Grow On Trees - InvestingChannel

Sometimes Money Does Grow On Trees

Proprietary Data Insights

Top Technology Stock Searches This Month

#3American Virtual Cloud Technology346,086
#5Advanced Micro Devices232,931

It Went Up! 

The other day, while differentiating between meme and penny stock investing, The Juice told you about a super speculative penny stock sitting near the top of our proprietary Trackstar database of the tickers generating the most investor interest. 

American Virtual Cloud Technology (AVCT)

It’s still near the top – #3 among the most searched for tech stocks – and it went up. From $0.19 to $0.23 out of the gate Monday morning. And up to $0.24 before settling to $0.21 at Tuesday’s close. 

Source: Google Finance

Like we said: 

With renewed interest amid buyout speculation, a similar move could play out. 

As a trader, you have to be lucky and good to make money on a stock like AVCT. And, if you do, the number one thing to take away from the experience after cashing out is don’t get too confident

And Now For Something Completely Different 

From pure speculation to making the most of your top holdings. 

Earlier this week, our partners at nicely illustrated how to generate income from oil stocks using Exxon Mobil (XOM) covered call options

Buying 100 shares of XOM would cost $9,321. The October 21, 105 strike call option was trading on Friday around $0.68, generating $68 in premium per contract for covered call sellers. Selling the call option generates an income of 0.73% in 32 days, equalling around 8.13% annualized. That assumes the stock stays exactly where it is. What if the stock rises above the strike price of 105?

If XOM closes above 105 on the expiration date, the shares will be called away at 105, leaving the trader with a total profit of $1,247 (gain on the shares plus the $68 option premium received). That equates to a 13.5% return, which is 140.5% on an annualized basis.

Solid work. Now you know what a covered call is alongside one concrete example. 

Scroll with us to see one of The Juice’s favorite rinse-and-repeat covered call plays. One that comes with a warning we introduce today.

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Sometimes Money Does Grow On Trees

Key Takeaways:

  • There’s no such thing as a totally risk-free investment strategy. 
  • However, writing covered calls against your core holdings comes close. 
  • You can rinse and repeat this option strategy literally forever. 


BarChart alluded to pretty much the biggest risk associated with writing covered calls: The possibility of getting your shares called away. In all of the covered call tutorials out there, you rarely see this scenario emphasized. 

Not to get too psycho-babbly on you here, but let’s use one of our favorite examples to illustrate the practical and emotional component of this risk. 

There’s a decent chance you own a little or a lot of the tech stock generating the most investor interest in our Trackstar database – Apple (AAPL)

If you own 100 shares of AAPL, you can write a covered call against your position. Because BarChart did such a nice job with XOM, we’ll be brief on the basics. But consider this

You consider AAPL a lifetime stock. You managed to accumulate 100 shares at a cost basis of $92 a share. Not too shabby. With the stock trading around $157, you’re sitting on a 71% on-paper profit, not to mention the quarterly dividend reinvestments. 

But, because you don’t plan to sell ever, you crave more. 

You read an article about covered calls. You take the next step and decide on this:


Source: BarChart

Apple trades weekly options. This one expires on Friday, September 30. 

If you sold that covered call, you’d generate a handsome $2.36, or $236, in premium income. You keep this money no matter what. 

In these tutorials, you often hear about your effective selling price. The strike on the call option you sold ($160) plus the premium you received ($2.36) equals $162.36. Setting aside your original cost basis of $92 and isolating this trade, you don’t “lose” money (on paper) if your shares get called away at $160 until AAPL crosses $162.36. 

Fair and objectively true enough

Considering your $92 cost basis, you’re in even better shape. Nothing wrong with buying at $92 and selling at $160, but really $162.36, thanks to that premium income. 

However, in our hypothetical here, AAPL went on a run, blew past $160, you had to give up 100 shares at $160, so you no longer own 100 shares of AAPL. Maybe after your dividend reinvestments, you’re left with a somewhat demoralizing and wimpy 0.8 shares or something. 

Salt in the wound of missing so much upside. 

Now you’re left to figure out if, when, and how to buy AAPL back as it soars higher. 

The Bottom Line: In future installments of The Juice, we’ll detail how to guard against this potentially undesirable eventuality. 

For now, pay attention to strike prices and option expiration dates. And don’t get too greedy. 

While you generate more income with a strike price closer to the underlying stock’s market price, you also increase your risk of losing your shares. We’ll get into the mechanics of this going forward, presenting different ways to approach the trade. 

Ideal situation – you own a boatload of AAPL. Say 500 shares. You might feel more comfortable with the risk/reward by repeatedly writing high-income producing covered calls on 100 or 200 shares knowing that, if they get called away, you’ll still have a formidable position in your favorite long-term stock.



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