A Triple Dipper: How to Make 3 Profits on 1 Stock Trade

This is a rather simple strategy with which I am sure a lot of seasoned traders are very familiar, possibly under some other name with which I am not familiar. I wanted to write about it because I don't see anyone talking about it anymore. Since the big hey-days of day trading and, of course, the burst of the Internet bubble of 2000, there seems to be a lack of patience that this strategy needs to work.

A lot of people seem to be moving back into the markets since the declines of 2000. If you were one of those that jumped back in during the early part of 2004 you reaped big profits. But now there seems to be a fair number of Wall Street Pundits that are beginning to raise the "irrational exuberance" flag once again. If you have been watching some of the unrealistic gains in recent high flyers, you may be looking for a bit more conservative way of being in the market.

In the early 70's I met a young Dean Witter Reynolds broker and told him I had a few dollars I wanted to put into the stock market. The first thing he told me was that unless I had $100,000 I wanted to invest one time into a diversified portfolio with a buy and hold strategy?or?. $10,000 I wanted to invest in a more aggressive "trading" strategy, he was not interested in my account. Keep in mind, this was a long time before the day trading craze hit. I was impressed with his straightforward and honest approach. However, I did not have $100,000 back then, but I did have a bit more then $10,000. With that we were off to the races, and this is the trading plan he put to work for me.

First of all he stayed away form the high flyers altogether. He followed a number of solid, top quality companies that had a history of paying above average dividends but still with a little bit of volatility. Both the dividend and the volatility are required ingredients.

We bought six to ten positions with an average of 300-500 shares in each position. Every stock we bought paid higher then average dividend. We did well with companies like Phillip Morris [MO], American Electric and Power [AEP], Battle Mountain Gold Co. [now a pink sheeter], General Motors [GM] and few others. I only mention them so you that are nuts-o for research (exactly the sort of thing I would do) can go back and see the sort of movement we had in these stocks back in those days. There were others of course, but that will give you some fodder for research. GM and MO may still work these days, but I have not looked at AEP in years and, of course, Battle Mountain is history.

Okay, so now you know what sort of companies we are looking for; solid, higher then average dividend paying companies with a bit of volatility. Hey, I never said this was easy! But to make it even more challenging, we need one more component to make the triple dip into the money - Options. To be more specific, we need Covered Calls only!!! Let me repeat that, we are only selling covered calls, no other options. You will have to be cleared by your broker for options trading, and you will need a margin account.

Here's how the play is made. You buy 300-500 shares of a stock that is going to be paying a dividend with in the next 15-45 days. You sell the 30-60 day covered call taking in the premium money and giving you that amount of money downside protection to offset any move against you.

The ideal trade will play out like this. You will buy the stock, it will pay the dividend while you own it, you sell the Covered Call collecting the options premium money, and hopefully the stock will be called away at the strike price. Obviously, you have to make sure you only sell the call with a strike price higher then your entry price.

Now let's apply the math on a hypothetical trade. Let's say you buy MO at $50 and it is paying $.25 dividend and the $51 call option is selling for $.25 with an expiration date 45 days out. Let's further assume the stock pays the dividend, and moves above the strike price of $51 by the expiration date and it gets called away. You will earn $.25 for the dividend, $.25 for the premium money on the call and $1.00 on the stock position itself for a total gain of $1.50 on 300 shares. That's $300 on a $7500 investment (using 2:1 margin account) for a 24% annualized yield on your money. More of the math: $300 divided by $7500 = 4% X 8 = 24%. Keep in mind you made the $300 in 45 days meaning theoretically you can do this 8 times a year. That's how you get the 24% annualized yield. Not to shabby! (Because commissions vary, I have not put them into the equation, something you will have to do obviously.)

Seems pretty easy doesn't it? Well it is, when it works. But like everything in the stock market (or in life itself for that matter) there is no sure thing.

Any number of things can happen. Here are just a couple of things you have to consider. First off, I would check to see what all the analysts are saying about any stock you are about to try this on. Make sure the company has a solid dividend history. I would also caution against making the play on a stock that is due to report earnings while you are in the options period. Also keep in mind that as a general rule a stock will dip in direct relationship to the divided paid.

Obviously this strategy is not always going to play out as our hypothetical trade did. However, I have had results similar to that as well as some much better, and "yes" some that did not work at all. What makes the play less risky than the stand alone buy and hold trade is that no matter what the stock does, you get the dividend and the options premium money giving you that much downside protection on a move against you.

I had a number of stocks that I would hold in my account and merely roll over the option money and collect the dividend on a regular bases, double-dippers, and was very happy not to have the stock called away.

I was very fortunate that I had met a broker who became one of my best friends and taught me this method of investing. I strongly suggest that you seek the advice of a professional broker; money manager; your attorney; your accountant; your present, past or future wife or husband; your doctor; your heirs, your auto mechanic or anyone else in the world that you can think of before you try this or any method of investing. (Okay, I think that covers about everyone.)

To learn more about Covered Call writing, check the resources at http://www.TraderAide.com. Good luck and happy trading!

No permission is needed to reproduce an unedited copy of this article as long the About The Author tag is left in tact and hot links included. We do request that we be informed of where it is posted so reciprocal links can be considered. Email floyd@sbmag.org.

Floyd Snyder has been trading and investing in the stock market for three decades. He was on the forefront of the day trading craze that swept the nation back in the late1990's both as a trader and as the moderator of one of the Internet's largest real time trading rooms. He is the owner of http://www.TraderAide.com, Strictly Business Magazine at http://www.sbmag.org, http://www.FrameHouseGallery.com and http://www.EducationResourcesNetwork.com

---

Stock Market System ... ONLINE STOCK TRADING ... Beyond Day Trading Basics & Tips

Day trading is all about making buy and sell decisions.... Read More

Valuation

Every day I hear from the "experts" on CNBC-TV and... Read More

Never Lose Money

Never lose money in the stock market again. Yeah, I... Read More

Economists

In today's volatile and confusing stock markets everyone is searching... Read More

365/7/24

What does it take to be a stock trader? It... Read More

Dividend Paying Stocks

I would like to share with the reader an article... Read More

Prosperity

It has fallen upon the consumer to make our economy... Read More

Stock Trading - Daddy, Why Arent We Rich?

One Saturday morning, while he was sitting at his computer... Read More

Starbucks Stock is Up

Starbucks earnings are up again and so is their stock... Read More

The Bottom?

Every day I hear someone on CNBC proclaim that "this... Read More

Its A Duck

If it walks like a duck, quacks like a duck... Read More

A Triple Dipper: How to Make 3 Profits on 1 Stock Trade

This is a rather simple strategy with which I am... Read More

NASDAQ 800?

In November of 2000 when the NASDAQ was trading at... Read More

Trading For A Living

How many times have you said to yourself, "I'd like... Read More

Commoditizing the world

Let's discuss commodities; with the latest Enron situation, it is... Read More

The Next Bull Market

We are already in it, but you can't see it.... Read More

Investment Clubs

Because you don't feel too sure about which stock or... Read More

Trading Tips No 8: Picking the Best Stock Market Price

Carefully thinking through your goal as a trader is of... Read More

Stock Market Investing: Knowing When (and when not) to Sell

One of the greatest challenges of investing in stocks is... Read More

Shorting Stocks ? The Basics, Part II of II

After the publication of the first part of this two... Read More

Acapulco - The Stock Market Dives

There is a famous cliff on the ocean in Acapulco... Read More

Option Trading Basics

Options trading can increase the profits you make when trading... Read More

An Old Proverb for Investing

"If you don't know where you are going, any road... Read More

My Stock - Right or Wrong

We all know the expression, "My country, right or wrong",... Read More

Investing Basics - Stocks, Mutual Funds, Real Estate & Online Investing

Have you ever thought of investing? Do you have a... Read More

Mr. Market

I constantly hear the talking heads on CNBC-TV, the radio... Read More

Buy Low - Sell High

Now where have I heard that before? I know. It... Read More

Direction

It is difficult to make money in a bull market,... Read More

The I Word is Coming to a Town Near You

Hello Inflation, it has been awhile, I see you on... Read More

Investing in Dividend Paying Stocks

I was recently interviewed for a press release through a... Read More

The Club

Yesterday I received my monthly issue of MONEY magazine. This... Read More

Municipal Bonds

Because there are so many stocks that are NOT paying... Read More

Stock Market Diversification

In one of my previous articles (Investing in the stock... Read More