Sure Fire Way To Get $1,000 Income?

Want to lock in $1,000 of income quite predictably? One strategy now has the potential to do just that, and potentially a lot more by leveraging the current macroeconomic climate.

If you were to look at the world’s conflicts through the lens of a technical chart analyst, it wouldn’t be a stretch to see that the “conflict trend line” is currently increasing over time. Whether it’s Ukraine vs Russia or Israel vs Iran, the rhetoric and military escalations seem to be heightening not lessening when viewed in monthly increments.

The rising tensions globally typically lead to concerns about transportation supply routes of oil and that in turn results in higher oil prices, which we have seen. If your outlook is not necessarily that tensions will further escalate but simply that they won’t diminish anytime soon, a trading opportunity arises.

One approach to capitalizing on the heightened oil price is to buy energy stocks and sell calls against them for income.

Key Points

• Rising global tensions are boosting oil prices, presenting an investment opportunity in energy stocks.
• By purchasing energy stocks like Occidental Petroleum and selling call options, investors can likely secure around $1,000 of income over a 60 day period, with potential additional gains if stock prices rise.
• This covered call strategy could yield an annualized return of 24% and offers a consistent income stream, though it comes with risks like potential stock price declines.

What’s The Trade?

Buying 400 shares of one of Warren Buffett’s favorite energy stocks now, Occidental Petroleum, will set you back about $26,680. Selling 4 contracts of just out-of-the-money strike calls will now produce about $1,068 of income over a two month period.

If the share price holds flat, the options will expire in about 60 days and generate just over $1,000 but what happens if the stock rises? In that case, the calls are assigned and you get to keep the premium from the options and make a little extra from the share price gains too.

And if the stock falls, then what? At that point, you lose on the share price losses but still get to keep the $1,000 and change from the options.

So in all cases, the option premium is yours to keep as long as you hold the position through to the expiration of the options.

Fast Forward in Time

Where novices draw a line under the trade is that they don’t extrapolate to what the percentage returns are over time. If they do a forensic audit of their own returns, most will not generate north of 20% annually for 5 years consecutively.

And yet this covered call strategy return annualizes to 24% if repeated. Now imagine continually selling calls every month or two for not just one year but two years or five years and quickly you see the merits of the strategy.

For a stock that has a history of steadily rising over time, selling calls may not be the smartest strategy because the price gains overwhelm the benefits of selling calls but for a slow and steady mover it’s often a highly lucrative approach.