Covered Calls and Naked Puts (for extra income)

Given an over heated and wild stock market, we thought it would be a great time to describe how we buy stocks in these markets. Our investing premise is the following:

1. We expect high(er) inflation, especially wage inflation, over the next 10 years.
2. We expect lower productivity across the United States over the next 10 years.
3. We expect most people will focus on key essentials first then everything else second over the next 10 years.

With that we’ve described the types of stocks that we like:

1. Energy companies (for a growing population)
2. Health related (and Insurance) companies (for an aging population)
3. Technology companies (for modernizing)
4. Housing (REITs) & Basic consumer goods companies (to keep people sheltered, fed, and connected)

And this is some of our criteria:

1. Reasonable P/E
2. Regular Dividend Payment
3. Diversified customer base (preferably global)
4. Diversified products/services (preferably globally or multi-nation or multi-state)
5. Track record (stability)

After we’ve picked the right stocks that meet our basic criteria we want to go one step further and try to monitor stocks that have the ability to trade options. One of our favorite strategies is to buy our stocks at a discount through the selling of naked puts. Once we own the stock, we want to generate extra income through the sale of calls on stock we own called a “covered call” option sale. The reason we like this strategy is because traditionally, most options (about 80%) expire worthless so it is often advantageous to cast a net for some additional seafood while we enjoy the buffet on board the ship.

If you are not familiar with Covered Calls and Naked Puts there are a ton of videos on Youtube on how to do it but here are links to a few:

Covered Call – https://www.youtube.com/watch?v=1gXlr18gWSY

Naked Puts – https://www.youtube.com/watch?v=wEzJohEAHU0

So the 6th criteria is to ensure we have Options trading on the stock.

If stocks suddenly plunge, we’ll likely take naked put positions first in small blocks to accumulate the stocks we wish to hold long term. It will be imperative to make sure we have cash reserves to be able to take any options assignments that come are way. We’ll keep you posted as the market mayhem continues but in the mean time…

Stay tuned and stay solvent…