Lori and I both have moderate 401K savings accounts which have grown and shrunk and started to grow again in the past couple of years. These accounts will certainly not be enough to sustain us after we retire and we've begun investing in more real estate rather than in the stock market. This, of course, is a risky proposition. I think of friends who bought houses in the mid-to-late '80's who are just now getting out from under their negative equity. If the market goes bust, or even flattens out, our real estate holdings could well put us under.
On the advice of our accountant, I opened a Roth IRA a couple of years ago. It's a retirement investment account, but it's funded completely by me with after-tax dollars. But the money that the account earns is completely tax-free FOREVER. (401K earnings are taxable once you start to withdraw funds.) Not having to worry about how much I'll owe in taxes is a great liberator and I think I figured out a way to capitalize on that principal. (If you'll pardon the double pun.)
I am going to start by selling most of the stocks that are currently in the Roth IRA. Then I'm going to use that money to buy stocks on which options trade. The stocks will also have to pay a dividend and have to be fairly stable.
As soon as I own the stock, I will sell short-term call options with strike price higher than the price I paid for the stock. This will immediately give me back part of the money I spent to buy the stock, but I will still own the stock itself. If the options are exercised and I have to sell the stock, I will have locked in a profit - the increase in the price of the share and the premium I was paid when I sold the option. If the options aren't exercised, I will hold the stock and sell new calls when the original ones expire. If the stock pays a dividend during the time I hold it, that money will also be part of the return.
This may sound complicated, but it is relatively straight-forward and I didn't invent the strategy. But what makes it so appealing to me is that I won't ever have to pay taxes on, what I hope will be, a healthy cash flow.
I plan to post messages here when I start next week. I won't say what stocks I'm trading, just my starting dollar amount, the cost of each stock, the and how much money each one makes or loses for me. If it turns out well and you're interested in the specifics, let me know and I can help you implement a similar strategy. (That offer is for friends and family. Anyone else I would be glad to advise as a consultant.)
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Okay - I've done the research that uncovered a couple of promising stocks for my covered call option play. I purchased the stocks this morning and sold the calls at the same time. At the time of purchase, the stocks are worth $14,566 and I received $1,180 for the calls. By my calculations, that's an 8.08% profit. If the stocks close higher on the day the options expire, I will have to sell them at their strike prices. That will eat into my profit a little and I will only make abou 7% on them. That is still a GREAT return inside of 30 days. If the stocks stay flat or move down, I will hold them and retain my profit. Then I'll write more calls when these expire in mid-November. I'll keep you posted.
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