Become Your Own Bank

By: Chuck Hughes

The following is an excerpt from Chuck Hughes' Lifetime Income System

Let’s explore my Lifetime Income System strategy called ‘Become Your Own Bank’, which is an income strategy that has generated consistent returns during every type of market condition.  Become Your Owner Bank is a covered call strategy that generates cash income from selling option premium.  The strategy produced consistent returns during the last financial crisis and the severe 2008 – 2009 bear market by investing in covered calls on bearish ETFs.  And it has produced consistent returns since the last bear market including bullish, volatile and non-trending types of markets.

Most investors are not familiar with the concept of selling option premium to generate cash income.  Selling option premium is a very simple but lucrative income strategy; the option income strategy known as a ‘covered call’ or ‘buy write’.

When you sell an option, cash equal to the option price or premium is immediately credited to your brokerage account.  Unlike a traditional stock dividend you don’t have to own the stock on the dividend date to receive the quarterly dividend and you don’t have to wait a year to receive a 2% or 3% annual dividend yield.

When you sell option premium on longer term options, you can get paid up to a 20% to 30% cash payment up front when the option is sold.  You get to keep this cash payment regardless of the price movement of the underlying stock.

Selling option premium to generate immediate cash income is the ideal strategy for any type of market, even in volatile markets and an uncertain economy.  When you can buy stock at a 30% discount you can profit if the stock price increases, remains flat or even declines 20% to 25% resulting in a much higher probability that the trade will be profitable.  This gives the option income strategy a huge advantage over a stock purchase strategy and allows you to profit in any type of market condition.

Added Dimension

This option income strategy works just as well with bearish trades which allow you to profit in bear markets when stocks and ETFs are declining in price.  Bearish income trades not only reduce portfolio risk but can dramatically increase profit opportunities and provide a whole new dimension to income investing.

I have been trading this strategy for many years.  During the 1990s I generated over 11 million dollars of gross option premium income.  I collected over $860,000 in option premium in over a year which resulted in over $71,000 in cash income per month!

Due to the versatility of this option income strategy and its ability to profit in up, down or flat markets, I was very active generating option premium income during the last severe bear market and during the strong bull market that followed.  During that 5 year period I collected more than $7.4 million in option premium income.

The key to selling option premium to generate cash income is to make sure the option you sell is ‘covered’.  There are both bullish and bearish covered call trades:

Bullish Covered Call Trades – Buy 100 shares of stock or ETF and; Sell a related call option.

Bearish Covered Call Trades – Buy 100 Shares of bearish ETF and; Sell a related call option.

For bullish trades the short option is ‘covered’ by owning a stock or ETF.  And for the bearish trades the short option is ‘covered’ by owning a bearish ETF.  Because the short option is ‘covered’ this is a limited risk strategy and you can’t lose more money than you invest.  Selling ‘covered’ option premium incurs considerably less risk than investing in stocks.

Here is an example of an option sale and the resulting amount of cash that was credited to my brokerage account.  I ‘sold to open’ 10 of the National Oilwell Jan 25-strike call options at 12.72 points.  Options cover one hundred shares of stock, so a 12.72 point option is worth $1,272.  Selling 10 options at 12.72 points resulted in $12,720 cash being credited to my brokerage account.  I get to keep this $12,720 cash payment ($12,708 after commission) regardless of the price movement of National Oilwell stock.

Sale of 10 Options at 12.72 Points Results in
$12,720 Cash Dividend Credited to Brokerage Account
$1,272 x 10 Contracts = $12,720