Covered Calls, Dividends & Passive Income

Would you buy a “risky” stock if you could get a 40% discount off its current share price? That’s what you can get with some of the high-flying stocks listed on Options Buddy.com.

I came across this site while doing some reading online. Many of the stocks listed on Options Buddy are what you would call high risk, but after investigating some of the stocks they do present an interesting value proposition. For example, Options Buddy lists Freddie Mac (FRE). As of August 2^nd the stock was trading at $7.98, so if you wanted you could by 100 shares for $798 (plus commissions). What make this interesting is if you bought the stock you could also sell a Jan 2009 $9.00 call for a premium of $2.00. This would immediately net back to you $200 or 25% of you original purchase price. Not bad!! Who doesn’t want a 25% rebate on anything they buy.

Now it doesn’t protect you from the down side risk, but again it’s important to buy the underlying stock not the premium. There is also the risk that FRE is going to go above $9.00 a share by the expiration date in which case you would miss out on higher returns. Again, I’m looking to hit a solid single or double instead of swinging for the fences. If you were to get called out above $9.00 it would represent a 38% gain in about 6-months; 25% of which you would have receive immediately.

If your longer-term bullish on FRE and you plan on a 12-month or longer investiment time horizon you can sell a Jan 2010 $12.50 LEAP (Long-term Equity AnticiPation Security) for a premium of $2.20. Again this puts approximately 27.5% of your purchase price back in your pocket and if you hold the stock until the option expiration and it’s above $12.50 your total return would be 84% in about 18-months.

In the interest of full disclosure I am not an investment professional and I have not tested any of these trades myself. I am not recommending anyone buy or sell stock in this fashion without consulting a professional. I am merely writing about some of my observations.

Some other stocks that present intriguing opportunities are:

Now most of these stocks are highly speculative at best, but even Jim Cramer says you can have one flyer in your portfolio.

It’s even more interesting if you look at LEAPS out to Jan 2010. For example, you can buy General Motors (GM) today for $10.23 a share and sell a Jan 2010 $20 LEAP and receive $1.90 per share premium. So you are getting approximately a 19% rebate off the cost of the stock. You keep the stock and in order for you to get called out it would take an almost 100% increase in the price of the stock. Again you are not protected from declines in the stock price, but if you believe a stock has been unfairly beaten down it may be worth a try.

I am getting ready to compile my July passive income results. I will hopefully post that later this week.