I’m sorry for my 3rd email of the day. The 1st two were trades I made, and this one is reporting a new strategy I just came up with. All very important items!
Let’s get into this new strategy.
In my Stock Alternative Portfolio of Wealth Builder I’m holding 20 long contracts of Inseego (INSG) LEAPS. These are 1/21/22 $10 Calls. I’ll be holding these Call option for a while. From time to time I sell short Calls against my long LEAPS to bring in extra money by way of premiums. When you do this the position is called a Diagonal Bull Call Spread. A Diagonal Bull Call Spread is when you sell a Call against a LEAPS where the Strike Price of the LEAPS is lower than the Call you sold, and the Expiration Date of the LEAPS is further out than the Call you sold.
I own 20 INSG 1/21/22 $10.00 Calls LEAPS and today I sold 20 contracts of the INSG 3/20/20 $12.50 Calls. The LEAPS Strike Price is lower and the Expiration Date is further out than the Call I sold. The reason this is important is I don’t own the 2000 shares of INSG so I cover this short option with the “right” to buy the shares. If I have to deliver the stock at $12.50 I have the “right” to buy the stock at $10. The brokerage houses look at this as being covered. The reason this is important is because it’s covered, the selling of the Call doesn’t hit my margin account as it would with a Naked Call. More money in my margin account, more money to trade with!
Sell to Open 20 INSG 3/21/20 $12.50 C @ 25¢ (+$500)
Let’s get into my new strategy.
Premium Reinvestment Strategy
Anyone who follows my Wealth Builder knows with my Double Dipping Portfolio I reinvest the dividend to build the amount of shares I own, in-turn collect dividends on those shares.
The Call I sold today on INSG gave me a premium of $500. I sold 20 3/21/20 $12.50 Calls at 25¢.
I paid a $2.60 premium for the LEAPS I own. The 20 contracts (2000) cost me $5200. Selling a 20 contract Call against this LEAPS gave me a $500 premium. Bringing in a $500 premium on a $5200 investment for the LEAPS is a return of 9.6%. That’s a pretty nice return for a 2 month position.
I took the $500 premium and reinvested it into stock as I do with reinvesting my dividends in my Double Dipping Portfolio. I bought the shares at $8.15 which gave me 60 shares.
Buy 60 Shares of INSG @ $8.15
I will call this my Premium Reinvestment Strategy. I’ve heard of reinvesting dividends but I never heard of a strategy reinvesting premiums. I like this new strategy. Today I did it with Inseego, which I think is a good candidate. They don’t have a really good Option Chain but the price of the stock is right.
Inseego does not pay a dividend. I’ll be looking for stocks that pay dividends. A high rated, low priced stock with a dividend will be a great candidate.
I did go out to $12.50 on the Strike Price, but if the stock does get high enough where I’d get assigned the stock is low enough to buy the shares to deliver if needed.
If you have any questions about my Premium Reinvestment Strategy, or anything to add, please send me an email.
Successful trading,
Steve
The Options Coach
i like it so you have to have the funds available to buy the stock at $10 right. I want to start doing this type of strategy but my account is still rather small but growing.
Hi Arnie, yes you would need to have the money available to buy the stock at $10 if you exercise on the long Call. I will have the money available to buy at the Strike Price of the short Call, $12.50. However, I hope the stock never reaches this point while my short Call is alive. This is why I go out on the Strike Price to $12.50 with the hope the stock does not get there before expiration. If it does, I’ll buy the stock to cover the Call.
Steve