How To Walk Away With Gains While Others Underperform
Last Friday, calls in five of our Maximum Income positions expired.
Three of those positions — Chewy Inc. (CHWY), Bank of America (BAC), and Palantir Technologies Inc. (PLTR) — expired worthless, which gave us the opportunity to sell more covered calls. We were already able to generate $226 in additional income from those positions earlier this week.
The other two positions — Duke Energy Corporation (DUK) and Macy’s (M) — were exercised for gains.
Today, I want to take a closer look at that Macy’s trade because I think it’s a great example of what actually makes this strategy so powerful: Even when the stock doesn’t move — or goes down! — you can come out ahead.
This isn’t just theory. We’ve seen with Maximum Income that it is possible to achieve positive results even when we select a stock that underperforms. In fact, when shares are falling, you’re better off selling covered calls than simply holding the stock.
Just look at our position in Macy’s (M), one of the two calls that was exercised on March 18. Since we opened the position on January 28, shares are basically unchanged. Over that period, shares have climbed slightly from $25.44 in January to $26.25 today, a 3.1% increase. That’s fairly in line with the S&P 500, which is up 4.5% over that same time.
But Maximum Income subscribers actually have a nice 18.5% gain in Macy’s.
How is this possible?
Even though our shares didn’t change much in price, we’re still generating money from selling options and collecting dividends. Essentially, while other investors sit back and hope the gains will come to them, we’re using covered calls to actively create the gains we want to see.
For every 100 shares of M that we owned, we collected $335 from selling two covered calls, as well as an additional $16 in dividends — in addition to $56 in capital gains. If we’d simply been HOLDING shares of M this whole time, we’d only have received the $16 and would be up a total of $97.
That’s right. With our easy Maximum Income strategy, we’ve managed to make 3.5 TIMES as much on our Macy’s position as the people just buying and holding.
That’s not to say covered calls are risk-free — no investment is. But they can help us reduce risk, which is as important to consider as income. In this market, where safe income is tough to find, selling options on high-quality stocks could be among the best strategies available.
Of course, not every trade in our portfolio currently shows a gain. But, in time, those positions have the potential to deliver returns like we’ve seen in M. Every time one of our options expires worthless, it means we can write another option on the stock, capturing another big income payment. This is why I only recommend selling calls on high-quality stocks that I would be happy to own for the long term.
As for this week’s trade, I still like Macy’s (M) at its current prices.
So far this year, shares have remained in a fairly narrow trading range, bouncing between $21 and $28. Even better, I’m still seeing excellent income opportunities in the stock. This week, I recommend buying back shares of the company to sell another covered call.
I believe Macy’s is undervalued with a forward price-to-earnings (P/E) ratio of about 6 based on this year’s expected earnings. Its reported price-to-book (P/B) value of 2.1 is higher than it should be based on the fact that much of the company’s assets include prime real estate in some of the most valuable retail districts in the world.
Based on some of its recent sales, Macy’s real estate portfolio is likely worth more than $15 billion. That’s more than twice the company’s current value and would mean the correct P/B ratio is under 1, indicating deep value.
This is a long-term opportunity, but I am recommending a short-term trade to benefit from recent market volatility.
Please don’t get bogged down in the fact that this is an options strategy. Like I mentioned, this is one of the most basic techniques out there. And in Maximum Income, I provide readers with a step-by-step guide on exactly how to execute each trade in order to generate extra income from the stocks that may currently be sitting idle in your portfolio.
If you want to learn exactly how to get your portfolio working harder for you, then I highly recommend trying a covered call strategy. And if you want a little help on getting started, check out my special presentation, which explains how to use this technique to receive monthly income on the stocks you own. You can view the presentation here.