The idea was to buy shares of tech giant Microsoft at beaten-down, bargain prices and then sell someone the right to buy those shares from you at a higher price.
This is the practice called “selling covered calls.” Back in 2010, you could generate a 17% annual payout by selling covered calls on Microsoft.
As regular readers know, Microsoft has a dominant position in its industry. It’s the No. 1 software company in the world with $77 billion in annual sales. Its average profit margin over the last 10 years is an enormous 28%. And it’s paying a large (3.4%) and growing dividend.
It’s “crazy” to think you can use a big, blue-chip stock like that to produce a SAFE 17% return. But it was true in 2010. And as I showed my readers, it was true again in 2011… and again in 2012.
If you started with $10,000 three years ago and traded in a tax-free account, you’d have between $16,000 and $18,000 today. That’s a 60%-80% return. (It beats what “ordinary” shareholders have made by 50%-100%.)
If you’re willing to learn the basics of this strategy, you can still use Microsoft to safely collect 17% or more in annual income payments.
When you sell covered calls, you collect cash upfront for agreeing to sell your shares for a higher price. You give up some of your potential capital gains for guaranteed income and added safety.
So this practice isn’t for gamblers reaching for the moon. This is for folks interested in a safe 10%-20% return in a year.
Right now, you can buy Microsoft for around $33 per share. You can then sell the December $34 calls for $0.95. That produces an instant “yield” of 2.8%.
The calls expire in December, a little over two months from now. If the stock stays where it is or moves lower, you keep your shares… and you can sell another round of calls. Making this trade five times in a year will produce a 14% return.
If the stock has moved higher by then, you sell your shares at $34. That will give you a 5.9% return. And you can do it all over again. Making this trade five times in a year will produce a 29% return.
Add in the annual 3%-plus dividend Microsoft pays, and you’re collecting between 17% and 32% a year on a cheap, dominant tech stock.
This trade has been a winner for three years in a row. I expect it to be another big winner this year.