The Profit Column: Income Four Ways
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The Oracle of Omaha was highlighting the importance of passive income with this quip. It’s morose, but true. Passive income can make a huge difference in your lifestyle and future retirement.
Even socking away some savings into 2-year Treasurys right now is enough to give yourself a guaranteed 5% return on your cash until 2025. In a high-interest-rate, high-inflation world, that can move the needle.
But passive income is not the end-all, be-all. Matter of fact, there are a bunch of great, active income strategies out there to produce far more than any passive strategy will do.
The perfect example is from Mike Burnick, whom I like to call TradeSmith’s premier “active income” generator.
Through his Ultimate Income strategy, Mike uses a four-pronged approach that trounces any passive income strategy out there.
- First, he gets paid to make low-ball offers on great dividend stocks below market value.
- Should he get the chance to buy those stocks, he earns regular dividends from holding them.
- In the ideal market environment he collects capital gains as these high-quality stocks rise.
- And in the meantime, he sells other investors the right to buy his stocks, at a price he’d be happy to sell them, if they fall.
I tell you this because a recent email headline that went to subscribers of Mike’s Ultimate Income advisory really caught my eye.
You might remember that as a week where the S&P 500 slid 3.4%, erasing billions in wealth. But Mike’s subscribers remember it as a week of options payouts totaling $555 in income per contract.
Seeing this, I decided this week’s Profit Column had to involve Mike’s Ultimate Income strategy.
Today, he’ll show us each step of the process that led to that huge week of option income returns. And he’ll share one of the many tickers he’s used to generate reams of income for his subscribers.
The Profit Column: Income Four Ways with Mike BurnickMichael Salvatore, Editor, TradeSmith Daily (MS): Hey Mike, thanks so much for joining me today.
Gotta say, I’ve been super impressed with the Ultimate Income strategy. I’ve seen many investment experts focus on just one aspect of your approach – whether it’s selling puts, buying dividend stocks, or selling covered calls. But you’ve managed to make all three of these strategies work together.
For our readers who may not be familiar with options income strategies, can you walk through how this all works?
Mike Burnick, Editor, Ultimate Income (MB): I’d be happy to, Michael.
The strategy starts with selling put options. This is a lot like putting in an offer to buy a stock below its asking price.
A put option represents the right to sell an asset at a certain price, called the strike price, by a predefined expiration date. So when you sell one, the party on the other side gets that control.
For doing this, we get paid a premium up front. And so long as the asset in question doesn’t fall to the price specified in the contract by the expiration date, we keep that entire premium.
MS: That’s a popular way to generate income in the markets, especially in times of volatility when put-option premiums are high.
But of course there’s a risk there. The stock could fall and you get assigned the shares – 100 of them per contract. What then?
MB: The beauty of this strategy is that is the entire focus of the service. These are stocks we would be happy to own, so getting assigned shares doesn’t worry me – it excites me.
By selling put options, we’re essentially putting a low-ball offer on stocks we believe in. We’re saying “I promise to buy that stock if it falls 15%. In exchange, you pay me $50.”
If it falls to that level and the option is exercised, you’ll be assigned the stock in your account at that price. And whatever income you received for selling the option lowers your cost basis even more.
So, when you do wind up owning the stock, you do it at a great price – and an even better price than where it’s trading.
Of course, we’re only doing this on high-quality, dividend-paying names. So once we own the stock, we keep collecting income through its dividend and enjoying capital gains along the way. Those are the second and third legs of the strategy.
MS: Now, once you own these great dividend-paying stocks, there’s more you can do than just wait for your quarterly payments, right?
MB: Right. Selling covered calls is the final leg of the Ultimate Income strategy.
Selling covered calls is similar, but opposite, to selling puts. When you sell a covered call, you sell another investor the right to buy your stock at a certain price. If it reaches that price by the contract’s expiration, you sell them the stock from your account.
We design the trades around this leg of the strategy so they’re not likely to exercise until we want to close the profit cycle. So we generate consistent income by way of dividends from owning the stock in our account, but also through continuously selling covered calls that have a high likelihood of expiring worthless – meaning we keep the premium earned for selling them, and also the stock itself.
MS: An example of this strategy coming together would be helpful to visualize it. Maybe we can cover one of your long-time holdings?
MB: Certainly. We recently completed this four-step process on Mondelez (MDLZ), the staple food company.
We first entered MDLZ into the portfolio back in mid-June 2022, when it was assigned to us at a price of $62.50. Since we earned $85 in premium for the puts that granted us the stock, already, we were reducing our overall cost basis.
Then, we proceeded to sell covered calls on MDLZ 13 times over the next year. Those trades generated a minimum of $405 in income.
Eventually, one of those covered-call trades resulted in the shares being called away, which led to a gain of about 23% when you factor in regular dividends and capital gains on the shares themselves.
MDLZ is actually the only stock that’s completed this “Profit Cycle” thus far. But it’s just one of dozens of high-quality, blue-chip stocks that we’ve sold covered calls on, week in and week out.
Right now, the portfolio is stacked with 17 dividend-paying stocks, and we’re selling covered calls on these names at opportune times for extra income.
At the same time, we’re constantly selling put options on new stocks that would fit into this long-term portfolio.
MS: It’s a beast of an income machine.
But to be clear, it’s not automatic to create an income stream like this. What you do is fairly active?
MB: Absolutely. This is a trader’s income strategy. But the gains are well worth it.
MS: And again, you had an exemplary week back in mid-October, with $555 in income earned that week alone. It really shows the power of building out this portfolio as you have, giving you plenty of ways to generate income each week.
Thank you for talking today, Mike. I’m sure our readers will find this strategy enlightening.
MB: Anytime, thank you for having me.
Mike Burnick’s Ultimate Income strategy has proven to be the best way to generate active income from the markets, bar none.
I see it as the perfect thing for someone who’s at or near retirement, but still has an itch for trading they need to scratch.
Mike’s income opportunities keep you engaged with the market – not to mention pay you for your time.
To your health and wealth,
Editor, TradeSmith Daily