How To Make Even More Money On Our Winning Speculative Stock Picks - InvestingChannel

How To Make Even More Money On Our Winning Speculative Stock Picks

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How To Make Even More Money On Our Winning Speculative Stock Picks

The other day The Juice compared one of our top stock picks for 2023, Uber (UBER) to Apple (AAPL) in a discussion about high growth tech stocks versus dividend payers: 

One key point to make clear about the word growth. 

When we refer to growth within the context of dividend growth investing, we can mean one of two things. One, a company that regularly increases (grows) its annual dividend payment. Two, a company still growing revenue and expanding its business. Ideally, we mean both things. 

When we refer to growth among non-dividend payers, we’re referring to traditional growth metrics in areas such as (and especially) sales and profit.

Back in the day when rumors swirled that Apple was preparing to pay a dividend again, some investors freaked out. Because a lot of people see dividend payments foreshadowing the end of a company’s hyper growth phase. 

Here’s the reality: Apple has done alright. Alongside a dividend payment the company has increased for the past 12 years, AAPL stock continues to move higher. It’s up approximately 305% over the last five years, outpacing the S&P 500 Index (SPY) and non-dividend paying tech counterpart, (AMZN), which are up about 61% and 43%, respectively, over the same time period. 

Take it on a case-by-case basis without blindly falling victim to either side of the to pay or not to pay a dividend extreme debate. 

That said, we’re pretty sure about two things: 

  • One, Uber is unlikely to pay a dividend anytime soon. 
  • Two, if the opportunity exists and you’re comfortable with the potential downsides, you might want to generate some income from your non-dividend paying holdings. 

If you listened to The Juice when we first suggested Uber stock late last year, you’re sitting pretty. YTD, UBER is up roughly 86%. Over the last year, it’s up about 103%. 

If this isn’t enough or you simply want to generate some income from this holding, consider writing covered calls against your position, assuming you own at least 100 shares. 

We won’t get into the basics of covered call writing. However, if you need a refresher, see this installment of The Juice. Today, we just want to outline an ongoing opportunity not only in Uber, but one of our other top picks for 2023, DoorDash (DASH), as well as loads of other stocks. 

Let’s say you own 100 shares of UBER. 

As of this past Friday, this position is worth $4,723 with the stock at $47.23. 

Also as of last Friday, you could have sold the August 25, 2023, $50 UBER call for approximately $1.55, generating $155 in premium income. No matter what happens, this money is yours. 

When you write/sell a covered call, you give the buyer the right to purchase your shares at the call’s strike price on or before the option expiration date. In this instance $50 on or before August 25.

If you do not get your shares called away, the option expires worthless. 

If UBER runs to, say, $55, you will likely have to give up your 100 shares. And you’ll have to sell them for $50, meaning you’re leaving $500 ($5 per share) worth of profit on the table. Of course, you partially offset that $500 with the $155 in premium income, so you will only have left $345 on the table in this hypothetical scenario. 

So that’s the big double risk: Not only do you risk leaving money on the table, but you also relinquish that position in UBER, a stock you might want to hold for the long-term because you, like us, think it has room to run. In fact, The Juice thinks UBER is a stock that relatively aggressive investors with time horizons measured in multiple years or decades should potentially keep as a core holding in their portfolios.  

We get deeper into the risks of selling covered calls, particularly around earnings and other volatile events, in a Juice we did around Tesla (TSLA) earnings last year. 

One way to mitigate this risk is to buy deeper, out-of-the-money calls. However, if you do this, you’ll likely collect less premium income. 

The beauty of this strategy – in a perfect world, all else equal, when it works (!) – is that you can rinse and repeat. On the “same” 100 shares, you can write a call option, then write another after the previous option expires. 

If you own multiple 100 share lots, you can do things like stagger expiration dates and keep some shares safe to the side by not writing covered calls against them. 

We also like the idea of looking at DASH options. 

As of last Friday, with DASH trading at $84.50, the August 25, 2023, $90 call traded for around $3.00. So that’s a potential $300 in your pocket. 

Just another strategy to keep in mind and in your back pocket if it strikes your fancy. 

The Bottom Line: Dividends aren’t the only way to generate income on the stocks you own. You can write covered calls. And, if you do it consistently, effectively and efficiently, you can amp up your returns by not only riding a stock’s upside, but collecting premium income to do with as you wish. 

At the same time, covered call writing works well when your stock – or the general market – trades sideways or is going through a rough patch. It’s a nice way to bide your time – and get paid to do so – while you wait out the valleys, even high-flying, well-performing stocks go through. 

Of course, what you ultimately decide to do is up to you and dependent on your knowledge of options and aversion to risk and potential downsides, such as missing stock price upside and losing your shares. The Juice is here to provide ideas and information to help keep the wheels turning.

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