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  1. Default Riding the Bull Market with Bull-Call Spreads

    When it comes to maximizing total return from the market-leading stocks, a well-oiled bull-call-spread option program is one of the very few strategies that can drum up heady short-term returns.

    The cornerstone of a high-quality bull-call-spread trade is to use Long Term Equity Anticipation Securities (LEAPS) call options to control the most expensive big-name stocks for a fraction of the price of the underlying share. From there, any number of methods can be adopted to sell volatility back to the market in the form of covered-call premium that not only brings in immediate cash to one’s account, it effectively lowers the cost basis of the LEAPS by the amount of the call sold.

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    I run the bull-call-spread strategy in a manner that targets getting paid every 45-60 days from selling short-term out-of-the-money calls against long-dated, deep-in-the-money LEAPS calls that expire at least a year out. By doing so, I buy plenty of time for my trades to succeed if my fundamental and technical due diligence pan out. Because I’m buying deep-in-the-money, I am paying for a lot of intrinsic value and very little in time premium. It is how I get paid all year long for being in assets that appreciate by 3-5 times the rate of the underlying stock.

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    Stocks like Boeing (BA), Adobe Systems (ADBE), Goldman Sachs (GS), Apple Inc. (AAPL), Northrop Grumman (NOC), Broadcom (AVGO) and Mastercard (MA) are just a few examples of the kinds of blue-chip, big-cap stocks that are bearing the torch of the current bull market rally. However, to own 500 shares in 10-12 of these hot names would require about a million dollars, which most retail investors simply do not have on hand. But by buying one-year LEAPS options on each name for a fraction of the cost of owning the stocks outright, an investor can control a portfolio of the same 10-12 heavyweight names for around $100,000.

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    If the stock closes above $170 on March 17, we’ll convert the LEAPS contracts into shares of stock because the positon will be called out the following Monday at $170. We sold the right for someone to buy our position at $170. In doing so, we make $4 in gains on the LEAP ($166 cost + $4 = $170) and pocket the $5 of call premium for a total of $9 in gains and option premium. When we divide that $9 into our $31 cost basis for the Boeing January 2018 $135 Calls, we bank a very handsome profit of 29% for a holding period of only seven weeks.

    If we sell the Boeing March 17 $170 Calls for $5.00 and shares of Boeing close below $170 on March 17, we keep the Boeing January 2018 $135 Calls and pocket the $5 premium. If we divide the $5 into our $31 cost basis, we make 16% over the same time period and go out to April or May and sell more out-of-the-money calls and repeat this trade over and over again, hopefully all year long.

    It doesn’t take a math wizard to figure how much can be realized in total return when 5-10 positions like this are at work. The potential gain is tremendous and it’s also exciting and a heck of a lot of fun to win big on pricey stocks using the power of leverage without using a margin account. I run a LEAPS advisory service called Instant Income Trader that utilizes this hybrid bull-call-spread strategy and our average returns between both called out trades and just bringing in monthly option premium is 21%. And we’re not even into our first full year of service. It’s how I like to be in the very best leading stocks at a fraction of the price and have a cash generating method in place that pays like a champ.

 

 

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