Double Your Money Every 2-3 Years

Have you ever heard of the rule of 72? 72 divided by the annualized return that you are able to get on your money and you have the amount of time required for your money to double. Let me give an example. If you were able to receive an annualized return of 36%, 72/36 equals 2.0. Therefore, if you were able to get a 36% annualized return on your money, your money would double every two years. Nice!

I know that 5/4 people aren’t good at math, but hear me out.

I was at a Cracker Barrel in Gainesville, TX. The cashier was having a hard time making change because the register was broken. I told him, “Don’t feel bad because 5/4 people aren’t good at math”. He said, “I believe it”. I said, “I don’t know, maybe it’s higher than that”. But I digress.

You’re next question might be, how can I ever get a 26-36% return on my investment? The 10 year treasure rate is 1.68% Well, funny that you should ask. I am going to show you how I’ve been trading covered calls on AAPL stock and we’ll do the math on them.

AAPL chart

AAPL chart 8/24/2012

Here’s a stock chart of AAPL on 8/24/2012. The closing price on Friday was $663. Here is the option chain for AAPL options.

AAPL option chain

AAPL option chain 8/24/2012

Let’s start by defining what an option is. Here’s an example. Let’s say your house is worth 100K. I pay you $5,000 today for an option to buy your house anytime within the next 5 years for $125,000. Theoretically, I would never exercise that option unless your home became worth at least $130,000.

On stock options, I prefer to sell OTM (out of the money) options expiring within the next 30 days. Why is that my preference? I think it’s human nature not to admit when you are wrong. People hang on to positions hoping that things will change. People probably bought these options 6-12 months ago and are hanging onto them, refusing to admit mistake. I’ll sell them for the last 30 days, because that’s when then most cost erosion takes place. In poker, I make money off of gamblers. In stock trading, I prefer to do the same.

As you can see, the Sept. 22 call options pay $12.50/contract. A contract is for 100 shares. Therefore, if I sold 1 contract, I would receive $1250. If the stock hits $680 by Sept. 22, I would make an extra $17/share or $1700 for those same 100 shares. Now, let’s do the math. $1250(option income)/$66300 (cost to buy 100 shares of AAPL)=.01885 If I multiply that by 12 to annualize it, it comes to 22.62%. I did it about a week ago, and the figure was 26%. If it hits 680 by Sept 22, here are the numbers, $1250 (option income)+$1700 (appreciation made from 663 to 680)/$66300 (cost to buy 100 shares of AAPL)=.04449. When I multiply this number by 12 in order to annualize it, it becomes 53% annualized.

The most common questions that I get is, “What could go wrong?”. Well, AAPL could go down and your covered call next month will be smaller than the 680. Let’s say it goes to 650, then your covered call option might be around 665. However, if you sell the covered call option every month, your cost basis of the stock is gradually reduced. How many years would it take before my cost basis on AAPL stock was 0? Well, using the 12.00 call option premium, 663/12=55.25. Therefore, in 4 years and 7 months, my cost basis for AAPL would be 0.

AAPL PEG 8/24/2012

My favorite stock ratio is the Price to Earnings Growth ratio. Basically, if the growth rate is higher than the Price/Earnings, then the stock is a bargain. Anything below 1.0 is good. Apple’s is .68. You might counter and say that you don’t trust the earnings estimates of the analysts. Maybe, you are right, but there’s lots of good stuff coming down the pike. For example, iPhone 5, iTV, iPad mini, China growth, and the 1 Billion just announced from the Samsung court case. AAPL missed it’s last earnings, but they also missed before the iPhone 4S came out, because people were waiting to upgrade. I think people are doing the same thing and waiting for the iPhone 5 to come out before upgrading.

How do you get out of the rat race? Lily Tomlin once said, “The problem with the rat race is that even if you win, you’re still a rat.” The only way out of the rat race is to have your passive income exceed your monthly expenses. Ever heard of the board game Cash Flow? It’s a great way to teach your spouse or teenager this concept. In the board game, everybody draws for an occupation. You have the chance to make investments along the way. In the beginning, you live “paycheck to paycheck”. You win the game by getting out of the rat race and having your passive income exceed your monthly expenses. Buying trinkets tends to set your back.

In poker, I try and get my chips in the middle when I’m ahead. I think the odds are in my favor. What do you think?

About Dale Perryman

Conduct workshops and seminars on leadership, management, and employee development. Founder of Center for Organizational Learning. Co-founder and creator of MyMeetingPro, a suite of apps for iPhone and iPad that create simply effective meetings. Specialties include leading change, meeting facilitation, developing R&D leadership, merger integration, and social media marketing. Enjoy playing poker and stock investing in spare time.
  • Really nice breakdown of your strategy!

    For me, I love the selling call strategy when you own the stock and like the company. However, as there is no downside protection, you need to this on a stock that you feel has limited downside and/or is pretty stable.

    Apple certainly fits the bill.

    • Jonathan,

      Thanks for the comments. You have always been a mentor to me on my stock selection strategy. The downside protection is in the reduction of cost basis by the covered call selling. My return also doesn’t take into account dividends or the reinvestment of proceeds from the covered calls.
      Sorry that I missed you last time I was in NYC. The program at Viacom went well.
      Sent from my iPad

  • Dale,

    What is the upside to telling us about this strategy? Wouldn’t you want to harbor this info for yourself so that you can horde all of the money? Also this position requires a very large upfront amount of capital because 1 contract is purchasing 100 shares at a time for one of the higher “priced” stocks on the market. Am I right with this thinking?

    • Allen,

      Thanks for the question. I don’t naively assume that I am powerful enough to affect the trading volume of Apple.
      I also have an abundant mentality. In other words, I believe that there is plenty out there for everyone.
      Also, I want to be the kind of person that helps others. Have you read about my survival experience? If not, here is the link http://www.jackofalltraining.com/trainers-2/trainers/dales-survival-story
      And the pictures
      http://www.jackofalltraining.com/trainers-2/trainers/dales-survival-story/dales-survival-in-pictures
      The experience taught me that one of the most important things in life is:
      1. Have I been who it is that I wanted to be?
      2. Have I had the impact that I wanted to have on people?

      It does take some capital to take advantage of this trade. I have also done similar trades on lower priced stocks. Perhaps Apple will one day do a stock split. I’ve heard some rumors which would make this strategy work with smaller amounts. 🙂
      Dale

      Sent from my iPad

  • For those of you who are following this strategy, it’s been a tough couple of months. Today I sold the Dec. 22 with a 580 strike price. The stock is currently trading at 559. I received 12.50 premium. If it doesn’t hit the strike price, the return is 2.2%/month or 26% annualized. If it does hit the strike price, the return is 6.0%/month or 72% annualized. I like the strategy even better than I did before. I believe apple will have good Christmas sales and Asia will help them to beat expectations. Happy trading!

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  • bill wilcox

    Dale, do you any covered call screeners to help you pick stocks to write covered calls on? Ever tried http://www.borntosell.com?

    • I have used a few covered call screeners. I have not seen this one. I’ll check it out.

  • Apple has continued to slide. The covered call strategy has helped to cushion the blow since my cost basis is influenced by the call option premium. I have sold the March 465 call options which expire on March 28. It looks like it might hit this strike price. My plan is to buy the stock back on Friday if it does. Hitting this 465 strike price will take me out of margin and increase my comfort level. Although, once I’m out of margin, I may sell some naked puts approximately 5% out of the money.

  • It’s been a tough year. I sold the May 31 440 and received around 7.30 for the option. I have sold naked puts on the way down and have accumulated more stock and margin than I feel comfortable with. Today, it hit my strike price in 2 days after I sold the option. It looks like it’s the first time this year that my stock will be sold. Right now, it’s dead money till May 31.

  • It’s been a tough year. I sold the May 31 440 and received around 7.30 for the option. I have sold naked puts on the way down and have accumulated more stock and margin than I feel comfortable with. Today, it hit my strike price in 2 days after I sold the option. It looks like it’s the first time this year that my stock will be sold. Right now, it’s dead money till May 31.

  • In July, my 425 options hit their strike price and were sold. I bought them back at 458 and sold the August 30 expiration for 6.80. Well they have hit their strike price plus some. Apple was trading around 503 today. Therefore, anything above 471.80 and I left some money on the table. As of today, I left 31.20 on the table. I’m not too worried about it when I can double my money every 2-3 years using this strategy. Your thoughts?

  • Well, it’s 8/29/13. Apple is trading at 491.70 today. At the close of business tomorrow, my stock will be sold at 465. Therefore, if nothing changes, I will leave 19.90 of profit on the table. In other words, I would be 19.90 richer if I had only owned the stock and not sold the covered calls. A bird in the hand is worth 2 in the bush and I will continue this guaranteed 26-29% return strategy. I plan to buy the stock back on Monday and sell the September 27 500 call option for 12.55 (todays price subject to change by Monday) By the way, when the stock dipped on Tuesday, I sold a naked put on Apple Sept. 27 at a strike price of 480. I received 12.70 for this put option. #apple #covered calls

  • In September, I sold the 515 call option and bought it back when the stock went down. It’s 10.02.13 and I sold the 505 call option with an expiration of 10.26.13. I received 9.95/contract.

  • In October, I sold the 505 call option and received 9.95 for the option. On Friday 10.25.13, it closed at 525. Therefore, the stock will be called away at 505 and I would have left 11.00/share on the table. I plan to buy the stock back on Monday and immediately sell the December call option for around 535.

  • In continuing with this experiment, my stock got called away at 505. I bought it back on 10.28.13 for 526 and sold the 11.29.13 expiration. I sold some for 540, others for 555, and others for 550. I received 11.80 for the 550’s, 15.00 for the 540’s, and 10.80 for the 555’s. Which ones would you have bought?

  • And the saga continues! Apple has continued to go up. In November, it hit it’s strike price of 550 on 11.29.13. I bought the stock back at 558.66 on 12.02.13. I then sold the Dec. 27 option with a strike price 580 for 7.25.

  • And the saga continues! Apple has continued to go up. In November, it hit it’s strike price of 550 on 11.29.13. I bought the stock back at 558.66 on 12.02.13. I then sold the Dec. 27 option with a strike price 580 for 7.25.

  • And the saga continues! Apple has continued to go up. In November, it hit it’s strike price of 550 on 11.29.13. I bought the stock back at 558.66 on 12.02.13. I then sold the Dec. 27 option with a strike price 580 for 7.25.

  • It didn’t hit my December strike price of 580. So I kept the 7.25 option premium and said “Thank you very much”. They are saying that it was an Apple Christmas. I sold the January 31 option today at a strike price of 585. I was able to get a 11.55 premium for it. Here’s what the numbers look like this month.