May 2021 Dividend Income Report

Slowing Growing monthly income

It’s the beginning of June so it’s time to take a look at May Dividends. This is my second go around with a monthly dividend income report. Since I just started tracking this my only comparison is the April 2021 dividend income. May is about $20 lower than last month. 

A Total of $54.56 in dividends in May from 9 different companies and 1 ETF.

General Mills (GIS)  – $1.53

AT&T (T) – $23.92

Verizon (VZ) – $2.51

CVS Health (CVS) – $7.00

Apple (AAPL) – $0.88

AbbVie (ABBV) – $16.90

Texas Instruments (TXN) – $1.02

Sirius XM (SIRI) – $0.18

Citigroup (C) – $0.51

Invesco S&P 500 High Dividend Low Volatility ETF (SPHD) – $0.11

Are Puts riskier than Calls?

Taking risks with puts and calls

The short answer is NO. Puts are not riskier than calls. This is also true for the opposite. Calls are not riskier than puts either. The long answer is, it’s way more complicated than picking a yes or no. It depends on a few factors and that is usually the case with options a lot of times.

Options are almost always fairly priced. The price you see at the moment is the fair value for it. If you see an option not fairly priced, there is no way you can take advantage of it as a retail trader. Algorithmic trading by big institutions will make that disappear before you can even decide how to take advantage of it.

Why do people ask this?

If you are looking at the options prices in an index, you will notice that the puts cost more than the calls. For example, I am looking at a SPY option with a strike that is $10 out of the money and compare it against a call that is $10 out of the money. SPY is around $415 so I am going to look at the $405 put and the $425 call.

$405 put cost $792 while the $425 call cost $480. That is a difference of $312. I am looking at SPY options that expire in the July cycle which is 54 days away.

Both of them are about $10 away from the stock price. The chances of stock moving up or down $10 should be somewhat the same. If the probability of the stock reaching $405 or $425 is the same, then the risk is the same….. but if the risk is the same then why does the put cost $312 more than the call?

Why are puts more expensive than calls?

The basic supply and demand model is in action when it comes to options pricing. Most portfolios are usually buy and hold portfolios. So the “cheapest” way to protect a portfolio from an unforeseeable market crash is to buy a put. So looking at the SPY example from above, you can say more people are buying the $405 puts compared to the $425 calls so they can get better sleep at night, then that naturally pushes up the prices of puts making them more expensive than calls.

The old adage of the market takes the stairs up and the elevator down plays a role in this. Nobody really knows when the market is going to crash but when it does, it usually happens very quickly. 

Whenever I look at my brokerage account, I am hoping for a sea of green with all the stocks I own going up. I don’t look at how much it has gone by. As long as it’s moving up, I am making money and my portfolio is doing better. It’s usually a tiny percentage and it’s grinding up slowly. But when there is a red day, I am looking at how much it’s down by and the panic sets in after depending on how bad of a day it is.

I have a small portfolio and I panic even though I am fairly confident that the stocks I own will eventually come back up. Now let’s imagine a professional money manager who has to answer to investors. Does paying up for puts seem all that bad if your job is potentially on the line?

Are puts always more expensive than calls?

I picked SPY and mentioned Index earlier on purpose. I looked at options 60 days out and almost 1000 days out and I couldn’t find an option cycle when calls are more expensive. I can’t think of a time I remember seeing calls being more expensive in the Index. So while Puts are usually more expensive in every underlying, that is not always the case. I can think of 2 scenarios where the calls are more expensive than puts.

1. Melt up in a stock

This is usually for whatever stock or industry is the talk of the town at the moment. This happened with Tesla in 2019. GameStop in Feb 2021. Almost all SPACs at the end of 2020 and beginning of 2021. Tilray in 2018 pretty much after they went public.

A melt up is when there is a sudden big up move in a stock and it keeps doing that for a few days where that’s the only stock people talk about. That’s when everyone is running to buy far out of the money calls like the $800 strikes in GME because any strike remotely close to the stock price is way too expensive for anyone to afford. The allure of great riches you see on Reddit and full-blown FOMO gives you the impression that you can still mint money with those far out of the money calls.

These are risky as hell because the big move has already happened and you are looking at very expensive calls when people are trying to lock in their profits and get out of the stock. You are going to be left holding the bag in that scenario.

I don’t have any great examples like the GME one right now. I don’t have a stock that is exactly melting up either. However, I have Roblox that has gone up by almost 20% in 3 days and the calls are more expensive.

Roblox (RBLX) closed at $82.50 on Friday and I am looking at the $75 strike put that is $7.5 out of the money to the downside and the $90 call that is $7.5 out of the money to the upside. The $90 call cost $585 and the $75 put cost $510. The call cost $75 more than the put even though it’s equally far away from the stock.

A 20% up move in the stock in the last 3 days has made everyone more hopeful that it will continue going up so why not get on this before it’s too late. This is driving more demands for the $90 calls compared to the $75 puts. I consider this very speculative and basically gambling. This is a scenario where there is more risk to the upside and you could argue that calls are riskier than puts in this case.

2. Options far into the future in individual stocks

This would be like a regular investment in my opinion. I am going to look at Facebook as an example.

Facebook is trading around $316 right now and I am looking at options that expire in June 2023. The $310 put which is $6 out of the money is priced at $5895 while the $325 call that is $9  out of the money is trading for $6320. The call is much further out of the money compared to the put I have chosen but it’s priced higher.

Since the stock market usually goes up over time it only makes sense that calls cost more because they have a higher likelihood of being in the money and that’s where you are going to see demand.

At the same If you are to look at options in the index like SPY, QQQ or IWM, those will still have the puts priced higher because they are going to be used as insurance against the calls like Facebook above.

Conclusion

There is a lot more information when it comes to how options are priced. But the question of whether puts are riskier than calls isn’t something that you should really consider as a blanket statement. There is no one answer that completely satisfies this question. 

This really plays into the statement of high-risk high reward low-risk low reward. You can generally look at it as if puts are more expensive, that’s where the risk is perceived to be by the market at that moment and that typically means that’s the direction you can find a higher reward.

Even then you will only enjoy this reward if the stock moves in the direction you want whether it’s a put or a call. When I see a “pricey” put, I’m not thinking it’s riskier. I’m thinking there’s more demand for these puts because people are trying to hedge their long portfolios. And that’s just the cost of doing business.

April 2021 Dividend Income Report

Squirrel away money for the future

This is my first dividend income report. I have written about stocks for monthly income and what other stocks to buy to boost passive income. It’s about time I show what this looks like. This is my first pass at it and I am already late.

Overall I received $76.18 in dividend income from 12 different companies for an average of $6.35 from each company. Not too shabby.

Iron Mountain (IRM) – $9.90

Seagate Technology ( STX) – $16.75

Occidental Petroleum (OXY) – $1.05

Franklin Resources (BEN) –  $1.96

Cardinal Health (CAH) – $0.49

Medtronic (MDT) – $1.16

Simon Property Group (SPG) – $1.30

General Electric (GE) – $0.05

Cisco Systems (CSCO) – $0.37

Altria Group (MO) – $23.22

Annaly Capital (NLY) – $19.80

PowerShares S&P 500 HighDividend Low Volatility ETF (SPHD) – $0.13

Not sure what dividend stock to buy in May?

Hand writing out dividends

Having a dividend portfolio that pays you every month or every quarter is great. Who doesn’t like to get paid for doing nothing right? But before you can have a portfolio that pays you, there is some groundwork that needs to be done in selecting the companies so you can get that passive income.

So at the beginning of every month I look through a list of companies that pay dividends to check whether there is any new stock that I can buy at a reasonable price. The reasonable price part is purely my opinion that I have come up with over time.

Checklist

These are my usual concerns I have before I put any money into a dividend stock.

1. Dividend yield

I look for a dividend yield of 2% or above. Anything below makes me feel like I am not getting the most out of my money.

2. Dividend growth

A high dividend yield is great to start with but if the company doesn’t continue to increase it then inflation is going to eat into it. A baseline line of 5% dividend growth looks good to me and that’s my starting point.

3. Dividend streak

This shows some stability. Have they been giving dividends for more than 10 years? That gives me some faith that they will continue to give dividends. The company could go through bad business cycles and still have a big enough safety net that could continue giving dividends.

4. Payout ratio

Wallet with money sticking out to show dividend payout

Payout ratio of less than 60%. A low payout ratio means that they have earnings to cover the dividend and to invest for the future.

5. P/E Ratio

I use the P/E ratio to determine whether I can buy the stock today at a reasonable price. In the past I used a P/E Ratio of 20 to decide what was expensive. I have come to realize that some stocks usually trade at p/e multiple higher than 20 all the time. So I don’t have a specific number for that anymore. 

Company

Fighter Jet to show the main business segment of Lockheed Martin

The stock that I am looking to add to my portfolio this month is Lockheed Martin (LMT). It’s not a household name. Lockheed Martin is a global security and aerospace company. It’s one of the largest defense contractors with over 70% of their revenue coming from military sales. We are talking about fighter jets, missiles and space equipment for NASA.

From a business standpoint, there are one of the biggest players in that industry with a few competitors. They are the primary manufacturer for most of the contracts they have won with the US government. This is an industry with a high barrier to entry which keeps them pretty insulated from being disrupted. This makes it very difficult for the company to just disappear or be overtaken out of nowhere. They also won a few contracts that’s going to last for the next 10 years.

As with most good things in life, there are some downsides to their business. These risks will play a factor in how successful they will be in the future. 74% of their revenue came from the US government in 2020. These agencies and the government in essence have control on Lockheed’s fortunes as they can delay delivery acceptance or cancel a contract. The F-35 program accounts for 28% of the revenue. Any negative outcome for that project in specific will have adverse effects on the overall company performance.

Now that we have a basic understanding of what Lockheed Martin does and how it makes money. How does it hold up against the checklist I mentioned earlier?

1. Lockheed Martin Dividend Yield

Dividend yield is at 2.53% as of Friday close. So this passes the 2% dividend yield test. Here is a 10 year chart of dividend yield for Lockheed Martin from Macrotrends. The dividend yield was almost 5% in 2013. It’s been below 3% since 2014 and looks to have settled between 2% and 3%.

2. Lockheed Martin Dividend growth

Lockheed Martin has grown its dividend by 9.8% compounded annually for the last 5 years and grown it by 14% compounded annually for the last 10 years. This is like getting a 10% raise everywhere. The dividend payout right now is $10.40 and in 2016 was $6.77 and it was $3.25 in 2011. This is a 53.7% overall increase over the last 5 years and a 325% increase over the last 10 years. For dividend investors who plan on holding for the long haul, the dividend growth rate should be of more importance than the dividend yield itself. Dividend yield is what matters when you invest initially but without a good dividend growth rate, you won’t be able to continue that momentum to grow your passive income.

Money growth over time to show dividend growth

3. Lockheed Martin Dividend Streak

This is for stability and Lockheed Martin is a dividend contender and has grown their dividends for the past 18 years. They went through the great recessions and still increased their dividends during that time. This past dividend streak doesn’t mean they will continue to do that in the future if they run into some major business issues.

4. Lockheed Martin Payout Ratio

Payout ratio is the portion of the earnings begin given away as dividends. Lockheed Martin has a dividend payout ratio of a bit above 40%. This leaves a lot of room for the dividend to keep increasing and possibly maintain that 10% dividend growth rate mentioned earlier. With 60^% of the earnings retained by them, they still have quite a bit of money to keep investing into business for new projects.

5. Lockheed Martin P/E Ratio

 I don’t have one P/E Ratio to narrow down the companies I look at. I look at the current P/E ratio against its historical P/E ratio. This is where I determine whether I can buy the shares at a reasonable price. There is not any magic to it. If the current P/E is close to the average or below compared to the past 5 years, then I would consider it as a good entry point. Here is a 5 year trend of Lockheed P/E Ratio. P/E ratio is at 15.75 right now and that has not changed much in the last 2 years. I look at this and think I am not getting a great deal but I am not overpaying either. 

P/E Ratio over time

Conclusion

Lockheed Martin is a good addition to any portfolio based on my checklist. As long as the US government continues to pour money into military equipment, Lockheed stands to benefit from it. Lockheed stock prices have gone up recently but it is not very far away from its 52 week low so I think this is a good time to seriously look into buying some shares.

6 Types of FIRE movement

Retirement Sign

FIRE movement is a trend among young people that’s growing in popularity thanks to its goal of retiring early. FIRE stands for Financial Independence Retire Early. The concept is based on following a very disciplined and aggressive saving and investing strategy. This continuous cycle of saving and investing over time will build a big enough nest egg that will give you the freedom to leave the workforce once and for all.

FIRE movement is not a new concept. It was first introduced in the book Your Money or Your Life written by Vicki Robin and Joe Dominguez in 1992. The main concept of their book is that most of us go through life exchanging time for money without thinking much about it.

While the FIRE concepts were created in the early 90s it took another 15 or so years for it to gain popularity. The great recession that saw 10 million+ people lose their jobs played a big part in it. A big portion of the people affected were the millennials who were barely out of school and very early in their careers. Along came quite a few blogs that focused on FIRE and millennials scarred by student loans and the thought of working till 65 while constantly fearing for their jobs made an ideal place for the FIRE movement to take off.

People who follow the FIRE movement get a bad name for being very cheap. What’s the point in saving a big chunk of your money and basically not enjoying life today in hopes of saving enough to retire early? What kind of “retired” life can you have after living with the bare minimum for so many years? There is no one size fits all for the FIRE movement. If you are planning to go down the FIRE path, you have to know that there are different types of FIRE.

There are definitely similarities between the different types of FIRE. You have to save a portion of your salary and invest it and grow to a point where the amount you earn from it can replace your salary. A simplified version of looking at it would be how do you plan on living once you retire and how quickly you want to get there, that would determine what type of FIRE is ideal for you.

How much do you need to save?

Anything I have watched, read or heard related to FIRE talk about the 4% rule and this seems to be universally accepted as a rule for everyone who considers FIRE-ing.

The amount you need to have saved and invested should be 25x your annual spending. The annual spending you have planned for your early retirement. Let’s say you plan on living in a budget of $50K during retirement. Then you will have to save 25x $50K which would come up to $1.25 million.

The idea is that the money you have invested will grow every year. If you are to withdraw 4% of your investments every year, the invested balance will not come down and should let you live your early retirement life forever.

Regular FIRE

This is the plain vanilla cookie cutter version of FIRE. This is the version where you maintain your current or working life lifestyle. If you live on $60K a year then you would need to save $1.5 million to reach the 4% safe withdrawal rate. I have seen on other sites that regular FIRE should have yearly expenses between $40K – $100K a year. I think the yearly expense is less important for regular FIRE. What’s important to you is probably maintaining your current standard of living and having freedom.

Lean FIRE

Lean fire is the bare bones version. This is where we start focusing on yearly expenses. For people who know nothing about the FIRE movement, this is the rice and beans or ramen noodles for every meal type of early retirement. That sounds a bit harsh but there is some truth to it. The type of FIRE is suited for people who plan to live a frugal and minimalist lifestyle. Commonly, Lean FIRE is for folks who can live on a $40,000 budget every year. 

Regardless of the type of FIRE you are aiming for you can expect pros and cons with it.

Pros of Lean FIRE

  1. Quickest way to FIRE
  2. Freedom earlier

Cons of Lean FIRE

  1. Living in a small place
  2. Limited to living in a low cost area
  3. Constantly make spending sacrifices

Fat FIRE

Fat FIRE is for the folks who want to live on a $100k salary after they become financially independent. you will need a bigger nest egg to achieve this. Using the 4% rule, you will need to have $2.5 million saved. As you can expect this will take longer than Lean FIRE and regular FIRE to reach.

Pros of Fat FIRE

  1. Few worries about spending
  2. Travel when you want to
  3. Feeling of safety with the money invested

Cons of Fat FIRE

  1. Takes longer to achieve

Barista FIRE

The types of FIRE listed so far is more of a “retired” version. Typically, you reach your FIRE savings amount and are done working. This is a great in between fully FIRE and working a job you really hate. In this one you have a part time job that covers some of the expenses and the remaining is covered by your investments. The common part time job is getting a barista gig at a coffee shop.

How would this work? Let’s say you are aiming for lean FIRE and need 40K every year. You have saved up $750K so far but really need $1 million saved up to follow the 4% rule properly. Using the 4% rule you can withdraw $30K. But you will still need another $10K to cover your frugal lifestyle. This 10K could come from the barista job or whatever part time job you get.

Pros of Barista FIRE

  1. Quicker way to reach FIRE
  2. Leaving a job you hate quicker

Cons of Barista FIRE

  1. Finding a part time job that pays well
  2. Don’t have full control of your schedule usually

Coast FIRE

Coast fire all about future planning. You figured out your financial independence amount at a very early stage. The goal is to have a high savings rate early in your career and have it reach a point where you don’t have to save anymore. The invested money will grow into the total amount you need to FIRE eventually. There is no specific amount for this. It could be considered as a sub category lean or fat. Coast FIRE is the method you use to reach Fire Status and LEAN, regular or fat is more related to your lifestyle

Pros of Coast FIRE

  1. Time does a lot of the work

Cons of Coast FIRE

  1. High savings rate and amount at young age when your salary is probably pretty low

MoFIRE

This is my favorite. MoFIRE stands for morbidly obese FIRE. In terms of spending limits I’m not really sure if there is a specific number for yearly expenses. If fatfire is at $100k this should be considerably more. It could be any number as long as it’s very high. Let’s say it’s $250K. How about doubling or tripling your current lifestyle? This should be everyone’s life goal.

Pros of MoFIRE

  1. No spending sacrifice at all
  2. Same as Fat FIRE and much better

Cons of MoFIRE

  1. Takes a long time to reach. Perhaps impossible.
  2. I can’t think of anything else

4 Stocks for Monthly Income

Alarm Clock with three stacks of coins

It’s pretty common for people to look into dividend stocks if they’re looking for monthly income. This is especially true for people who are retired, who are nearing retirement and the early retirement FIRE movement folks.

Dividends are the portion of the profits that’s paid out to its shareholders on a regular basis. Buying stock in the company makes you a shareholder and investor. Shareholders and investors used interchangeably a lot. The dividend amount and how often they pay are usually determined by the company and the majority of the companies pay every three months.

This is great but what if you use dividends as your primary source of income to live everyday. Or you’re looking for some passive income every month. This is where monthly income from dividend stocks comes into play.

Here’s a list of 4 companies that pay dividends every month.

  1. Realty Income (O)
  2. Main Street Capital (MAIN)
  3. SL Green Realty (SLG)
  4. STAG Industrial (STAG)

There are more companies that give a monthly income but some lack consistency, some don’t have a long history of paying dividends. The criteria I used to filter them down are –

  1. Companies paid dividends for around 10 years or more.
  2. No missed dividend payment during the 10 year or more time frame.
  3. Increased dividend payments over time.

Companies fitting these criteria gives a certain level of confidence as it shows longevity, consistency and commitment to their track record. This is particularly important because we have no control over the dividend policy of the company. You have to use the information that’s available online to determine whether these companies deserve your investment.

Most of the companies in this list are REITs (Real Estate Investment Trust). REITs are companies that own real estate properties and produce income by renting or leasing out their property.

The business model of these REITs on a very basic level is very much like you buying a house and renting out to make a small profit after paying your mortgage, property tax and maintenance. On a larger scale these are big corporations that have access to a lot of money and can buy big commercial properties and rent them out to other large corporations for lease agreements that are in excess of 5 years. 

Slight difference would be that they specialize in long term leases under a net lease agreement.

Here is a little bit more information about each of these companies.

1. Realty Income (O)

Realty Income is a REIT that focuses on commercial properties under a long term net lease agreement. A net lease agreement means that the renter is responsible for paying a portion or all the property taxes, maintenance costs etc. This is like having a rental property without any of the tenants problems.

Realty Income is so proud of paying dividends on a monthly basis that their company tagline is “ The Monthly Dividend Company”. Realty Income definitely has their investors in mind and know that people are mostly buying their stock for the monthly dividend. Their home page provides details on how the stock has performed since being listed in NYSE and how long they have paid dividends. I found this on Realty Income home page.

Dividend Metrics

  • Current Dividend Yield: 4.8%
  • Dividend per share monthly: $0.235
  • Dividend per share yearly: $2.81
  • 10 year Dividend Growth rate: 4.9%
  • Years paying dividend with increases: 28

Looking back to the last 10 years they have raised their dividend by an average of 4.9% on a yearly basis. Easy way to look at it is if you got $100 in dividends the first year, the second year you received close to $105 in dividends. The third year would be 5% on top of the $105 and so on.This is pretty good in my opinion since it’s above the regular inflation rate of about 2%.

Seeing an average of 4.9% annual dividend growth rate might seem very small and unimpressive because well it’s just 4.9%. Monthly dividend per share for Realty Income in 2010 was $0.144, 2015 was $0.191 and 2020 was $0.234. 

From 2010 to 2015 – an increase of 32.6% in dividend payout over a span of 5 years. From 2010 to 2020 – a massive increase of 62.5%. 

What’s really important to understand from this is that you can only enjoy these massive dividend increases if you have been invested in the stocks for 5 or 10 years. The 5 year and 10 year difference also demonstrates the need for being invested in dividend stock for a long period of time. The longer you are invested in a stock that raises their dividends regularly, the better you will do over time. 

Not being able to see the impact of what a 5% annual growth rate is probably the reason why it’s difficult for people to grasp onto the concept of the power of compounding, but that’s a topic for another day.

2. Main Street Capital (MAIN)

This is the only company on the list that is not a REIT. Main Street Capital is an investment firm that provides long term debt and financing to lower middle market and middle market companies. That’s just a fancy way of saying providing loans to companies with annual sales up to $1 billion.

Main Street Capital has found a nice sweet with the companies they are helping out with loans. The companies they are helping out are usually too big to get any loans from the SBA (Small Business Administration) and at the same time too small to get any consideration by Wall Street. Main Street Capital as their company name is pretty smart branding if you think about it.

Dividend Metrics

  • Current Dividend Yield: 7.6%
  • Dividend amount monthly: $0.205
  • Dividend amount yearly: $2.46
  • 10 year Dividend Growth rate: 5.1%
  • Years paying dividend with increases: 10

After reading through Realty Income’s 10 year dividend growth rate of 4.9% and further breakdown of the dividend amounts in 2010 vs 2015 vs 2020, I don’t think there is a need to have the same breakdown for each company. You get the general idea behind it.

I found something very interesting about their dividend policy. They have a very conservative dividend payout on a monthly basis and have a special dividend like a bonus paid out 2 times a year. This was cut for 2020 for obvious reasons. I like that they try to be safe with this so when they have a difficult year like 2020, they are not looking to cut or pause their regular monthly dividends. The $2.46 dividend is without the special dividends so once business picks up again, the total dividends will be closer to $3.00 per share a year.

3. SL Green Realty (SLG)

SL Green Realty is another REIT. It is the largest office space landlord in Manhattan and its primary focus is to acquire more properties in Manhattan and maximize value.

I am not very sure of investing in a office space focused landlord in Manhattan with all the work from home. 

SL Green Realty is a very new player in the monthly dividend game. They have had dividends since 1997 but they always paid on a quarterly basis until recently. The switch to monthly dividends occurred in March 2020. Dividends since 1997 shows a good track record but that is very deceiving. SGL fell on some hard times during the financial crash and cut their dividends to $0.1 every quarter until 2010. From 2010 onwards they have steadily raised their dividends to $0.295 every month in 2020. To make this a fair comparison, calculating the dividends on a monthly basis they have raised it from $0.03 to $0.295 over 10 years. That’s a huge 785% increase in dividends over 10 years.

Dividend Metrics

  • Current Dividend Yield: 5.8%
  • Dividend amount monthly: $0.303
  • Dividend amount yearly: $3.64
  • 10 year Dividend Growth rate: 24.4%
  • Years paying dividend with increases: 10

4. STAG Industrial (STAG)

STAG Industrial is another REIT. They focus on industrial and logistics properties – think of warehouses and distribution centers for all the online shopping you do. This is one of the companies I can think of that has done extremely well during the pandemic, especially considering that Amazon is their biggest tenant and rents about 40% of their properties.

Similar to SL Green Realty, they also paid dividends on a quarterly basis and slowly transitioned to monthly dividends in October 2013.

Dividend increase for STAG industrial is quite small and you can’t expect a big dividend hike if their history is any indication. Dividend increases have been $0.01 on a monthly basis every year since 2015. The tiny dividend hike is the disappointing part of owning STAG stock but I think the future is very bright for them since their main properties are distribution centers and warehouses. eCommerce sales are only going to go up from here so they are well positioned to take advantage of that. 

Dividend Metrics

  • Current Dividend Yield: 4.7%
  • Dividend amount monthly: $0.12
  • Dividend amount yearly: $1.45
  • 5 year Dividend Growth rate: 1.1%
  • Years paying dividend with increases: 9

Conclusion

You might get the impression that I am suggesting to invest in all 4 of them. My suggestion would be to pick one or two from this list based on how you think their future is going to look like. The performance of these stocks for the last 10 years only goes so far and nobody can predict the future.

Each of these have their own pros and cons. If I had to pick two from this list I would put Realty Income first because they have paid dividends for a really long time and then I would take STAG industrial because I believe they are in an industry that has a lot of potential growth.

Trades of the Day 01/15/2021

Twitter

Previously sold a TWTR $46 Put, $70 Call – 02/19/2021 Strangle for $312 on 12/18/2021. This has gone very poorly since with TWTR stock moving around $55 to around $45.

Initial management plan is out of the window now and it’s all about just surviving to buy it back for break even.

I have moved the call from the $70 to $55 strike and collected additional $88 in credit making the total credit collected to $400.

Breakeven for this trade if the options expired today would be $42 on the put side and $59 on the call side.

Another note – with the introduction of the beginner portfolio page, I will probably stop trades of the day post and put more energy into the beginner portfolio and topics for newbies.

Introducing Beginner Portfolio

Fishing for Money by selling options

I wrote about what are options and how to make money with options. The next logical step would be to put “how to make money with options” into action and see how it goes.

Starting amount for the portfolio is $5,000 – that should be the minimum for a beginner in my opinion.

I wanted this portfolio to be from the first of the year. since we are 2 weeks passed that, I have to take some shortcuts. I am going to cheat and use my trade from 12/30/2020 as my first trade for this portfolio.

Beginner portfolio has been added to menu bar on top. There is going to be some changes on it as I am still trying to figure out the best way to show it. Right now I am thinking 1 table for each position and 1 chart to track portfolio total.

Goals:

  1. Make 10% ($500) for the year overall
  2. Create “Monthly Income”
  3. Introduce new concepts when things go wrong
  4. Take profit at 50% 
    1. If a put option is sold for $100. Plan is to buy it back for $50 instead of waiting till the expiration date.

How to make money with options

Money in an Envelope

People usually look into options trading because they think it’s a means of getting rich quickly. Yes, there are instances where some have definitely made an enormous amount of money very quickly but the truth of the matter is very few have done that and most have lost money.

This is more of my opinion on how someone should start with options or better yet now that I know better if I could have a redo then this is how I would start with options. This is not a get rich quick method at all. This would probably fetch you between 5% – 20% a year if everything goes well.

So with my redo, I would start with something simple and straightforward. Selling a put would be the easiest to start and it’s also something that could be understood because it’s the closest thing to buying stock directly.

Before getting into the details too much, there are definitely some requirements that needs to be taken care of

  • Understand what options are
  • Money
  • Brokerage account
  • Small list of companies that you’re willing to buy
  • Understanding your risks with selling a put

The order I have listed above is not perfect, it’s what made sense to me. The important matter  is that you understand what all of it is and know the risks you are taking on.

Understanding what options are

Since this is a write-up about options and how to start with options, it’s quite important that you know what options are and I have a write-up on this that I did a while ago that you can find here. If you’re short on time the part that you want to look out for is selling put options.

Money

You already know this, you need to have some money if you want to start investing. Better question is how much money? Starting off with options $5,000 seems like a decent number for a beginner. It goes without saying the more you have, the better. More money gives you a lot more flexibility.

Brokerage account

If you are already investing then this is not really a concern. Most likely, the platform that you’re on already has options capability.

If you are looking for one, Thinkorswim by TD Ameritrade seems to be the most popular platform from what I’ve read. I have not used them so I can’t be sure. 

I started investing in 2016 on Robinhood and i think my first options trade was on Robinhood in June 2018 and I have continued using them.

If you’re signing up for a new account, you should look for commission costs and check if they have any promotion so you can get some freebies while you’re at it.

And a word of caution some of the brokerages have a tendency of saying commissions are $0 per trade but they usually have something written in smaller font that says it’s $0.65 per contract so it’s not exactly zero dollars per trade for options.

Small list of companies that you’re willing to buy

You’ll be creating a watchlist of companies that you’re interested in buying. The rule of thumb that I would use if you’re starting with $5,000 would be to find companies that are $25 per share and below. You can scale this up based on how much you’re starting off with. If you have $10,000 then $50 per share.

I’ve used finviz screener to come up with my watchlist because they have a filter for price that gives you under $10, under $20 etc. It doesn’t have an under $25 in the dropdown menu but you can fiddle around and create a watchlist with a few companies to your liking.

How did I come up with $25 per share as the threshold for a $5,000 account? it’s what I’m comfortable with. More on this below.

Technically the smaller the better so the $25 is just a guideline of what your upper limit should be.

Understanding your risks

If you read the post on what are options? and particularly the selling put options portion then you know if you’re using the $25 upper limit that I suggested earlier then that means that every time you sell a put, you’re allocating close to $2,500 as collateral (because each options contract is 100 shares).

This is also the reason why I said if your starting amount is $5,000 you want your stocks to have an upper limit of $25 because with each trade you’re probably risking half your money.


Now if you’ve done all these steps –  good. you can start and this is what you’re trying to do.

You are going to take on the role of an insurance company. This is the best comparison that I could come up with.

Using car insurance as an example – you pay your premiums and the car insurance company provides you with coverage if you get into a fender bender.

By selling a put, you are the car insurance company. You will get the premium the moment you sell the put option and you will have to cover the costs if the buyer gets into a fender bender. Fender bender in this case would be the stock you sold the put on is below the price you picked.

The steps are as follows.

Pick the Stock

Most of the hard work for picking the stock has been done already with the creation of the watchlist. From the watchlist, pick the stock that’s having the worst day.

Pick an expiration

I typically like to pick an expiration date that is 30-60 days out into the future preferably the third Friday of the month. Third Friday is the monthly expiration, those contracts are the ones that are most sought after and the ones that people are usually looking to buy or sell. If you pick an expiration date less than 30 days, most likely you won’t be able to sell the put option for a price that is worth the risk you are taking on. This could vary a lot depending on the stock.

Pick the strike price you want to sell

Time to put on the bargain hunting hat and decide what discount you would like for the stock. A 10%-15% discount seems nice to me. so if it’s a $25 stock you want to look for a strike that is $22.5 or a bit lower. You can change this to your risk profile. The closer you are to the current stock price, the more risk you’re taking on and you get paid accordingly.

Collect premium

This is the car insurance portion where you want to get the premium or monthly payment or whatever you want to call it. I look for about 1% – 2% premium for the money that I have to set aside as collateral. If I’m using the $22.5 strike, then I’m committing $2,250 towards this investment. The premium I would like to get for this risk is about $45.

Premium is just the amount I get for selling the put option. 1% – 2% is just a number that I look for. Depending on how much risk you’re willing to take you can play around with this number. Stocks that’s considered risky will have more premium than the less risky ones. 

So let me put this all together with the real stock to see what it looks like.

Step 1. Pick a stock –  I’m going to pick a Rocket Mortgage RKT for the purposes of this illustration.

Step 2. Pick an expiration –  I am looking for the next third Friday which is February 19th, 2021. This fits the guideline of at least 30 days into the future.

Step 3. Pick strike price –  Stock is trading around $20 a share right now. I want the 10%-15% discount, I am going to play it safe and select the $17 strike put for my put options which is about a 15% discount.

Step 4. Collect Premium –  $17 strike put is selling for around $55 which is a bit above 3%. Much higher than the 1% – 2% that I am usually looking for, so I am open to selling this put.

The mindset that I’m going to have here is that Rocket Mortgage is trading about $20 per share right now and I’m interested in buying the stock just not at the current price. However I’m willing to buy 100 shares of it at $17 by Feb 19th 2020. And getting $55 while waiting is not bad at all.

The best thing that can happen is Rocket Mortgage RKT stock price doesn’t go anywhere close to $17 and stays above the $17 per share price from now till February 19th 2021. If that’s to happen then I get to keep the $55 that I got initially and I move on.

The worst thing that can happen is Rocket Mortgage RKT stock price is below $17 by Feb 19th and it gets progressively worse the further away it is from the $17 strike price. For whatever reason, let’s say it’s trading at $10 by Feb 19th then I am forced to buy rocket mortgage at $17 a share but now since the stock is trading at $10 it’s only worth $1,000 for the 100 shares which is going to look like a loss of $700 but I guess I can feel okay about it because at least I have the shares now. I will probably have to hold on to them until the price recovers. This is also the reason why you want to only sell puts on stocks that you are willing to own. Do this enough number of times over and over and this is bound to happen at some point.

Let’s imagine that you are able to do this over and over for a year and are never in a position where you are forced to buy the shares, then this will make $55 about six to seven times a year which amounts to $330 on the $1700 you set aside as collateral. That’s about a shade under 20% return in a year which is really great.

One question that’s left over from all of this would be why should you have $5000 in your account if you are only planning to use only $2500 on each trade. That’s just leftover money to use whenever a great opportunity comes along. You never know when a great opportunity will come along and whenever it does you want to have the funds to do something about it. This cash reserve is also called dry powder. 

Conclusion

For folks starting with options, this is going to be a bit cumbersome and it will take some time to get used to these steps. After a few iterations it will come more naturally.

This step by step cheat sheet of sorts would come in handy for people who are looking to buy specific stocks.  

A few things to remember are pick companies you want to own, define the risk you are comfortable with and only sell puts for prices that you think are worth the risk you are taking. 

Bonus tip:

Once you sell and you want to sound like a know-it-all then here two things you could say. I am going to use the Rocket Mortgage RKT example again.

  1. You could say you are short the $17 strike put – It means you sold the $17 strike put.
  2. You could say you are long RKT – it means you want RKT to go up in price.