Disclaimer: Any securities or trades mentioned in this blog post is not a buy or sell recommendation, any form of investments have its risk and due diligence is to be performed before any investment.
In this post, I'm going to show you how to invest with a small portfolio, that allows you to collect cash flow from the stock market.
(Step-by-Step)
In fact, this is the strategy that I used to collect 40.3% in "dividends" from my CSCO trades.
Related: How I Made 40.3% in "Dividends" Using The PMCC
This blog post is where I deconstruct the entire strategy as detailed as possible so that you could model it as well.
- Step #1 - Follow The Long Call Guide to Buy Long Calls
- Step #2 - Milking The Cow When Overbought
- Step #3 - What To Do If Gets Exercised
- Step #4 - Rinse & Repeat
For this blog post, I am going use my BAC trades as a case study.
Step #1 - Buy Call Options
That's right - in order to use the PMCC, you need have long positions of your call options first.
You have to read the entire "Long Call Guide" to understand what call options I would buy based on the guidelines outlined in the guide.
It is absolutely crucial to follow the proper portfolio sizing, strike price selection, date to expiration, etc - in order to get the most value out of the PMCC strategy.
Remember that we only want to hold profitable business using the "Funnel Method" as well.
Once I have bought call options based on the guidelines, I can then proceed to Step 2.
Step #2 - Milk The Cow
Remember about Stochastics in the Long Call Guide?
Stochastics is a technical indicator commonly used to determine if a stock has been overbought/oversold.
- If the Stochastics is below 20, the stock price is considered oversold.
- If the Stochastics is above 80, the stock price is considered overbought.
So why is this step called "Milking the cow?"
You see, let's say I was hungry and I had a cow in my farm.
Instead of making myself a good steak by slaughtering the cow - I could just milk the cow, and have a filling glass of milk instead.
The same thing when it comes to call options.
When the share price increases, my call options are making substantial profits.
Example of call options making profits
However, instead of closing my call options for a profit of $2,370 - I could sell call options instead to "milk my profits".
The only reason why I do not close my profits immediately is because I made my assessment of BAC to increase back to its intrinsic value of $35.
(Note that valuations of banks are different from other companies - you don't use the "Thermostat Method" to valuate banks.)
Even though, I believe that BAC can go up further in the long term, I know that in the short term, it will likely fall because the stochastics is overbought (i.e. >80).
So instead of closing my buy call options, I sold call options instead.
What does selling call options means?
When you sell a call option, you are promising to sell 100 shares of the underlying stocks.
And because you are making a promise, you are collecting premium.
The row in green represent me buying 4 call options on BAC for $530 each - which is $2,120.
The remaining red rows were the "milking" trades that I have done after buying 4 call options on BAC.
Note: For every call option I bought, I will only sell half the quantity of call options.
This means that since I have bought 4 call options, then I will only sell 2 call options.
I will sell the call options at the strike price of the current market price.
(If I only bought one call option, then I wouldn't execute this strategy.)
When we sell a call option, we have two possible scenarios by the end of expiry date:
Let's give an example of the first trade in 27 May 20, where I sold 2 call options on BAC, at the strike price of 25.5, and it expires on 5 Jun 20.
And since it is a sell call, I collected $54 in premium per option contract - which is a total of $108 in option premium.
Let's see what was the share price on 5 Jun 20 (the expiry date of my sell call).
On 5 Jun 20, the share price of BAC is $28.11
What do you think happened to my buy call options?
But don't forget that I have sold call options at 25.50 - so when the share price shot up, BAC was above the strike price at 5 Jun 20.
So what would happen to my sell call options?
Yes, it will get exercised - and I will end shorting 200 shares of BAC.
So you can see that my sell call options are losing money.
Am I bothered by the sell call losing money?
Well, you can see that I am still making money overall.
But I want you to notice that I am only making paper profits of ($2370 - $471 = $1899).
I have seen so many investors getting happy over paper profits only to lose it a few days later.
But remember that because I sold call options - I have real profits from the option premiums that I have received.
Why is this important?
Simply because you can't pay the bills with paper profits.
But don't forget that because your sell call options are exercised, you are now shorting 200 shares of BAC at $25.50.
Step #3 - What To Do If Exercised
When your sell call options get exercised - you will end up shorting shares.
However, because you only sell half the quantity of your buy call - you will still remain profitable if the share price continue to climb.
Now that I have 200 short positions, what do I do next?
I then sell put options at the same strike price that I have shorted the shares.
You can see that on 10 Jun 20, I sold 2 put options at the strike price of 25.5.
So when I sold two put options, I am promising to buy 200 shares at the strike price of 25.5.
The question is this.
Do I need to have 200 X 25.5 = $5100 in cash?
The answer is no - because I have shorted 200 shares previously and the broker have already given me the $5100.
When we sell a put option, we have two possible scenarios by the end of expiry date:
In this event, do I mind if my sell put options get exercised?
The answer is no - because even if the options got exercised, it would simply cover my shorts.
The best part is this - when I sell the put options, I also collected $52 in option premium for every sell put option, which is a total of $104 in premium.
Step #4 - Rinse & Repeat
So in summary, this is the entire cycle of the Advanced Poor Men's Covered Call.
This is the entire process flow of what I have discussed above.
And since my target price for BAC is $35 - once the share price of BAC hits $35, I will then closed all my positions.
To summaries the current outcome of the trades at the point of writing, here's the spreadsheet that I used to track the options trades.
Click on image for full size
The above trades are all the option premium that I have collected - and it is a total of $536.
Remember how much I spent to buy my 4 call options - it was $530 x 4 = $2120.
The real cash flow or "dividend" yield is around 25.28% in the span of 2 months.
I will continue to rinse and repeat this process to milk even more cash flow from my BAC positions until it reaches its target price.
Conclusion
In short, the "APMCC" is a powerful strategy to milk cash flow out from your investments while waiting for the underlying asset to reach your target price.
This also means that it is absolutely crucial that we are investing only in quality businesses.
If you are not sure how to find quality companies - do check out the "Funnel Method" to avoid poor quality companies.
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