Do This to Protect Yourself Against An Implosion In Any Stock You Want to Own

“It’s so personal…”

I made you a promise when I started Total Wealth – that I would make it the most valuable investing newsletter you’ll ever read. I would do that, I said, by offering a mix of analysis, opportunity, and tactical tips needed to prosper and protect your wealth in today’s complicated financial markets.

Today I’m going to keep that promise with a look at a Total Wealth Tactic we haven’t covered yet – how to squeeze every last penny in profits out of stocks you own.

It’s not what you’ll find in a typical newsletter.

It is much more personal because it starts with a story from one of your colleagues – Ron C. – who pulled my team and I aside between presentations in Carlsbad, California last week to explain what today’s topic has meant to him and his money.

Here’s the story…

The Mistake that Delayed Retirement for 17 Years (And Counting)

Ron leaned in…

“I was camping with some friends back in ’99,” Ron told me. “They worked for Intel, and they all couldn’t wait to tell me how they all planned to retire in just a couple years, since they had millions of dollars in retirement savings tied to Intel stock – clearly stock they wanted to hold” (emphasis added).

Hearing they had all their eggs in one basket made him feel kind of uneasy. “Guys,” he said, “have you thought about protecting all this?”

Turns out they hadn’t.

Tragically, Intel’s stock got slammed a few months later when Dotcom became Dot.Bomb. Ultimately, it would lose more than 56% of its value within just a few months from August to December 2000.

Worse, Intel trades only $1 higher today than it did 17 years ago.

Ron never found out whether or not his camping buddies succumbed to emotion and sold Intel on the crash. But, he does know that 17 years after they’d planned to retire and live like kings, they all still work at Intel.

Sigh.

Double Your Income Potential Even If Dividends Don’t

Chances are you know people in a similar predicament. They’re stuck working long after they could have retired simply because they didn’t protect their investments when they made them, nor as they held them. Worse, they fail to take a few simple steps to maximize profits.

That’s like a storekeeper not protecting his or her inventory. If it’s just sitting on the shelves, it’s not making money. That’s great if you think somebody will come along down the line, blow off the dust, and buy what you’ve got, but pretty much a waste of time in the interim.

Most investors will never think this way, which is why they’ll doom themselves to mediocre returns at best and miss out on gobs of income they could have been earning all along.

Imagine you’re in a situation like Ron’s friends.

You pounced on Apple in November of 2011 when it traded around $50 per share and picked up a cool 1,000 shares… or perhaps you worked there long enough to have accumulated 1,000 shares. Either way, your stock was worth $50,000.

Then, only 10 months later, the stock brushes past the $100 mark, meaning you’ve got a 100% gain on your plate. The dividend issued that prior summer hasn’t hurt either, which is why you’re looking forward to watching your position push on even higher.

If you’re really thinking ahead, you may have even decided to cash out when Apple hits a specific profit target, a move, incidentally that puts you ahead of 99% of your investing peers.

But, what happens if Apple stumbles in the meantime?

Apple is a volatile stock. It lost more than 80% of its value in the Dotcom bubble, and in 2008 it also lost more than half its value from May to December. If you’re not thinking about how to maximize profits when that happens, you’re leaving huge amounts of money on the table that could otherwise be in your pocket!

Enter covered calls.

A “covered call” is an options strategy that helps you protect against meltdowns in a stock you own by selling call options.

Contrary to what many investors believe, covered calls are one of the most conservative of all options strategies. What’s more, covered calls can help you beat range-bound market conditions like we have right now.

In plain English, covered calls are perfect for investors who want keep the stocks they own and produce a fair amount of income, too.

Conceptually, covered calls are easy to understand and, therefore, a perfect Total Wealth Tacticfor people who want to own stocks and squeeze out every possible penny in profits.

There are three terrific benefits:

1. There is always less risk in buying a stock and selling covered calls against it than simply buying the same stock without selling a call.
2. Your cost basis is always lower when you sell a covered call than an investor who just buys the stock because the cash you receive means your break-even is lower.
3. You can develop a hefty income stream above and beyond dividends because there is no limit to how many times you can sell covered calls.

To sell a covered call, you need to own the stock first. Then, you sell one call option for every 100 shares you own. Your break-even then becomes the purchase price, less the cold hard cash you get from selling your options.

For example, right now Apple is trading at $107.59 per share. The July $110 call options are priced at $3.75 as I write this. Selling 10 (because you have 1,000 shares) means you’ll collect a juicy $3,750 in cold hard cash immediately. Your breakeven drops to $103.84 ($107.59 minus the $3.75 you receive from selling the call).

Then, one of two things is going to happen.

If Apple trades higher and is above $110 per share come July 15 when they expire, you fork over your shares, enjoy the $2,410 in profits you collect on its move and the extra $3,750 from selling your call options. Then, presumably, you do it all over again, assuming, of course, you still want to own Apple.

If Apple trades lower, you keep the cash from the call options you’ve sold when they expire worthless and you keep your stock, too. Then, you rinse and repeat, selling still more options to generate more income.

Now, a quick side note.

There are legions of options traders who short-circuit right about now because they believe that owning shares of a stock that’s dropped below your break-even is a bad thing. That’s true if you’re trading speculative junk, but remember, we’re talking about stocks you want to own for the long haul here. In other words, quality stuff worthy of your investing dollars.

Obviously, I’ve just scratched the surface here. Options can be as complicated as you want to make them… or as simple.

I prefer simple every time.

Covered calls can significantly boost your profits over time and they’re a great way for investors to harness profits that you’d otherwise leave on the table.