Home
>
Stocks & Mutual Fund
>
A Triple Dipper: How to Make 3 Profits on 1 Stock Trade

A Triple Dipper: How to Make 3 Profits on 1 Stock Trade

This is a rather simple strategy with which I am sure a lot of seasoned traders are very familiar, possibly under some other name with which I am not familiar. I wanted to write about it because I don't see anyone talking about it anymore. Since the big hey-days of day trading and, of course, the burst of the Internet bubble of 2000, there seems to be a lack of patience that this strategy needs to work.

A lot of people seem to be moving back into the markets since the declines of 2000. If you were one of those that jumped back in during the early part of 2004 you reaped big profits. But now there seems to be a fair number of Wall Street Pundits that are beginning to raise the "irrational exuberance" flag once again. If you have been watching some of the unrealistic gains in recent high flyers, you may be looking for a bit more conservative way of being in the market.

In the early 70's I met a young Dean Witter Reynolds broker and told him I had a few dollars I wanted to put into the stock market. The first thing he told me was that unless I had $100,000 I wanted to invest one time into a diversified portfolio with a buy and hold strategy?or?. $10,000 I wanted to invest in a more aggressive "trading" strategy, he was not interested in my account. Keep in mind, this was a long time before the day trading craze hit. I was impressed with his straightforward and honest approach. However, I did not have $100,000 back then, but I did have a bit more then $10,000. With that we were off to the races, and this is the trading plan he put to work for me.

First of all he stayed away form the high flyers altogether. He followed a number of solid, top quality companies that had a history of paying above average dividends but still with a little bit of volatility. Both the dividend and the volatility are required ingredients.

We bought six to ten positions with an average of 300-500 shares in each position. Every stock we bought paid higher then average dividend. We did well with companies like Phillip Morris [MO], American Electric and Power [AEP], Battle Mountain Gold Co. [now a pink sheeter], General Motors [GM] and few others. I only mention them so you that are nuts-o for research (exactly the sort of thing I would do) can go back and see the sort of movement we had in these stocks back in those days. There were others of course, but that will give you some fodder for research. GM and MO may still work these days, but I have not looked at AEP in years and, of course, Battle Mountain is history.

Okay, so now you know what sort of companies we are looking for; solid, higher then average dividend paying companies with a bit of volatility. Hey, I never said this was easy! But to make it even more challenging, we need one more component to make the triple dip into the money - Options. To be more specific, we need Covered Calls only!!! Let me repeat that, we are only selling covered calls, no other options. You will have to be cleared by your broker for options trading, and you will need a margin account.

Here's how the play is made. You buy 300-500 shares of a stock that is going to be paying a dividend with in the next 15-45 days. You sell the 30-60 day covered call taking in the premium money and giving you that amount of money downside protection to offset any move against you.

The ideal trade will play out like this. You will buy the stock, it will pay the dividend while you own it, you sell the Covered Call collecting the options premium money, and hopefully the stock will be called away at the strike price. Obviously, you have to make sure you only sell the call with a strike price higher then your entry price.

Now let's apply the math on a hypothetical trade. Let's say you buy MO at $50 and it is paying $.25 dividend and the $51 call option is selling for $.25 with an expiration date 45 days out. Let's further assume the stock pays the dividend, and moves above the strike price of $51 by the expiration date and it gets called away. You will earn $.25 for the dividend, $.25 for the premium money on the call and $1.00 on the stock position itself for a total gain of $1.50 on 300 shares. That's $300 on a $7500 investment (using 2:1 margin account) for a 24% annualized yield on your money. More of the math: $300 divided by $7500 = 4% X 8 = 24%. Keep in mind you made the $300 in 45 days meaning theoretically you can do this 8 times a year. That's how you get the 24% annualized yield. Not to shabby! (Because commissions vary, I have not put them into the equation, something you will have to do obviously.)

Seems pretty easy doesn't it? Well it is, when it works. But like everything in the stock market (or in life itself for that matter) there is no sure thing.

Any number of things can happen. Here are just a couple of things you have to consider. First off, I would check to see what all the analysts are saying about any stock you are about to try this on. Make sure the company has a solid dividend history. I would also caution against making the play on a stock that is due to report earnings while you are in the options period. Also keep in mind that as a general rule a stock will dip in direct relationship to the divided paid.

Obviously this strategy is not always going to play out as our hypothetical trade did. However, I have had results similar to that as well as some much better, and "yes" some that did not work at all. What makes the play less risky than the stand alone buy and hold trade is that no matter what the stock does, you get the dividend and the options premium money giving you that much downside protection on a move against you.

I had a number of stocks that I would hold in my account and merely roll over the option money and collect the dividend on a regular bases, double-dippers, and was very happy not to have the stock called away.

I was very fortunate that I had met a broker who became one of my best friends and taught me this method of investing. I strongly suggest that you seek the advice of a professional broker; money manager; your attorney; your accountant; your present, past or future wife or husband; your doctor; your heirs, your auto mechanic or anyone else in the world that you can think of before you try this or any method of investing. (Okay, I think that covers about everyone.)

To learn more about Covered Call writing, check the resources at http://www.TraderAide.com. Good luck and happy trading!

No permission is needed to reproduce an unedited copy of this article as long the About The Author tag is left in tact and hot links included. We do request that we be informed of where it is posted so reciprocal links can be considered. Email floyd@sbmag.org.

Floyd Snyder has been trading and investing in the stock market for three decades. He was on the forefront of the day trading craze that swept the nation back in the late1990's both as a trader and as the moderator of one of the Internet's largest real time trading rooms. He is the owner of http://www.traderaide.com, Strictly Business Magazine at http://www.traderaide.com, http://www.traderaide.com and http://www.traderaide.com

limousine service Round Lake .. Lockport Chicago limo O’Hare

In The News:

Stay up to date on the latest AI technology advancements and learn about the challenges and opportunities AI presents now and for the future.

The CyberGuy explains why healthcare organizations are vulnerable to hackers after there have been a half dozen data breaches this year.

Developed at two California universities, the innovative technology combines brain-computer interfaces with advanced AI to decode neural activity into audible speech.

Microsoft patches 12 critical flaws, but six have already been exploited by criminals. Kurt “CyberGuy" Knutsson says updating your system is only a short-term fix.

Tech expert Kurt “CyberGuy" Knutsson discusses how robots can milk, feed and clean cows on dairy farms, boosting efficiency and comfort.

Tech expert Kurt “CyberGuy" Knutsson says quantum internet ensures unhackable security and redefines online privacy and speed.

Kawasaki's CORLEO is a hydrogen-powered, AI-driven rideable robot. Tech expert Kurt “CyberGuy" Knutsson reports on this new way of thinking about off-road transportation.

The CyberGuy breaks down five mobile privacy terms that could make a difference when it comes to keeping your personal information safe.

A groundbreaking robot that's like a real-life Wall-E uses advanced artificial intelligence to replicate natural gestures and deliberate actions with striking accuracy.

If not properly managed, Windows Defender Application Control, a security feature with Windows, could be a potential security vulnerability.

Stay up to date on the latest AI technology advancements and learn about the challenges and opportunities AI presents now and for the future.

FlashBot Arm, a semi-humanoid robot, acts more like a human than traditional robots, and you may see it working at a restaurant, healthcare center or hotel.

There are multiple ways to find your missing Android phone after it goes missing. One method involves using a smartwatch to ping your phone.

The NeuroOne OneRF Ablation System is a new device with FDA-cleared technology designed for both diagnosing and treating neurological disorders in one procedure.

The CyberGuy provides tips to protect yourself from criminals who use various methods to make unauthorized transactions using your account information.

New drone technology maps land and water with stunning accuracy, giving researchers and conservationists a new way to understand our planet.

Stay up to date on the latest AI technology advancements and learn about the challenges and opportunities AI presents now and for the future.

X hit with massive data breach with 200 million records leaked, including emails. Tech expert Kurt “CyberGuy" Knutsson offers seven tips to help protect yourself.

Atlas robot by Boston Dynamics amazes tech expert Kurt “CyberGuy" Knutsson with its breakdancing moves.

Tech expert Kurt “CyberGuy" Knutsson talks about how Google kept Android SafetyCore details quiet until it scanned users' photos.

Hydrogen trucks debut in Georgia, sparking debates on costs and green freight gains. Kurt “CyberGuy" Knutsson comments on this promising chapter in green logistics evolution.

Tech expert Kurt “CyberGuy" Knutsson says ChatGPT learns from chats, but you should avoid sharing sensitive information to protect your privacy.

Beyond Aero's BYA-1: Hydrogen-electric jet with zero emissions, reduced costs, 2030 launch. Kurt “CyberGuy" Knutsson discusses a potential game changer in the evolution of air travel.

Kurt "CyberGuy" Knutsson explains how you can creatively repurpose your old unused Android devices, which are full of potential and hidden value.

Mech the super-humanoid robot can lift up to 132 pounds and is designed to tackle stressful and repetitive tasks that often lead to workplace injuries.

A Triple Dipper: How to Make 3 Profits on 1 Stock Trade

Stocks & Mutual Fund