I keep searching around, trying to find the safest, yet worthwhile one year method of investment. Searching and scanning through various sites, 1 Year CD's are now averaging about a 5% return. That is not bad, compared to what recent years have yielded. Money Markets seem to be on the rise as well, pushing through 4 3/4%, nearing 5% return as well. The 30 year bonds are yielding 5 3/4%, nearing 6%. All though these are decent returns compared to recent years, but isn't there a method out there that could offer similar protection but yield 10%, 15% or 20% return?
BUt, how would we go about finding such a strategy?
First of all...You need to keep a portion of your portfolio in safe, fairly liquid investments to be sure you have some emergency cash on hand. You know, if the roof starts to leak.
Why do we like CDs? Only one reason I can think of...They're government insured for up to $100,000. There is nothing safer that I know of...But .
That's where something I call a "Simulated CD" comes in.
You can't simulate the iron clad safety of a CD but you sure can blow away the returns and retain some safety using the following strategy:
Pick a stock you think is pretty solid. Let's use XYZ for example.(not a real stock)
Set a one year or so price target for the stock. XYZ is now trading at around $50 so a one year price target of $60 (20% increase) would probably not be unreasonable. Last year the stock went from $35 to $50 (30% increase).
Pick a comfortable price floor for the stock for one year from now. A reasonable price that the stock will probably not drop below. I don't think XYZ should drop below say $40 by JAN expiration a year or out in time.
Buy the stock and sell the January LEAP (covered call option) at your acceptable price floor. You are committing to sell the stock for the LEAP Strike price in January of the selected year.
For the XYZ example here is how the numbers would work out:
You buy XYZ for $50 a share and sell the one year out JAN 40 LEAP for $16.90 a share. The cost to you is $33.10 ($50-$16.90 = $33.10) a share for the stock and you have committed to sell it for $40 a share on expiration day in January, one year from now. If the stock does not drop below $40 a share between now and then, your return on this investment would be 21% over the period. That compares very well to the current CD rates and you don't need to do anything else for the investment until the Monday after expiration in January a year from now when the XYZ stock will disappear and $40 a share will automatically drop into your brokerage account. On the risk side...XYZ would have to fall below $33.10 for you to lose money on this. Is XYZ's price going to drop 33% this year?
And unlike a CD where you pay significant penalties if you need your money sooner than maturity, with this type of investment you can "unwind" the position any time if you need the cash. Depending on market conditions, you may or may not make a profit if you try to close this investment early.
WARNING: There are risks involved with this kind of investment. If the stock drops like a stone, you could lose your original investment. It is critical that you choose stocks that are solid.
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Step-By-Step Procedure – Finding high return "Simulated CDs"
1) If you have not done so yet, go to http://www.poweropt.com/logon.asp.
2) Enter your User ID and password then click the [Log On] button.
3) When the MY HOME page appears, click the "Covered Call" navigation tab in the top left.
4) Now click the "Search" link in the "Covered Call Tools" section of the page - near the middle.
5) Scroll down the page until the search settings area appears. To find "Simulated CDs" simply click the drop down menu for "Search Settings Saved As:" and select "Simulated CDs". The system will automatically run a pre-set search for you. If you wish to make any adjustments to those parameters, simply click the field you wish to adjust and type in the numbers that apply to your thoughts.
6) For more information on what the column headings mean, move your pointer over one of the underlined heading and in a few moments a definition will appear.
NOTE: Once the "Simulated CDs" search has been loaded, you can change any of the search settings that you would like and re-save that search as one of your own.