I remember reading somewhere, “There are only so many hours in a day that one can sell to make money. It is important to have passive sources of income, i.e. money received for doing nothing.”
Investments generating regular interest (CDs & bonds) and dividend (stocks, ETFs, mutual funds) payments is an obvious choice. To squeeze out some more money on top of the dividends from a stock or ETF, writing covered calls is a great strategy. If there are 100+ shares of a stable company in your portfolio, you should consider writing a covered call.
Disclaimer: I am not a financial professional. Don’t do anything solely based on what you read here. I am not responsible for your losses but, you may send me a cut from your profits.
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Over the last week, I dabbled into two new kinds of investments that I had never traded before.
- Covered calls: When you own some shares in your portfolio, you can sell the rights to buy them at a certain price. I sold these call options for Bristol Myers Squibb (BMY) with strike price of $30, expiring in Sept 2009. If the stock gets to $30 (I doubt that it will) by Sept, I’ll be required to sell the stock to whoever bought the options. Anyway, $30 is above our cost basis, so, selling there won’t be too bad. If it doesn’t get upto $30, the option expires and I keep the proceeds. It is like getting an extra dividend payment. And, the nice thing that I can sell call options again after the current ones expire in Sept. I am planning to do the same with other stocks we hold as well.
- Bonds: Simple boring bonds issued by large corporations like Caterpillar (CAT) and General Electric (GE). I didn’t have enough bonds in the investment mix and these days, they are on sale. I picked up these bonds with 5.5% interest rate for 90% of their face value ($1000 bond for $900) making their yield to maturity more than 6.5%. My investment will double in just over 10 years.
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