WHAT CAN YOU DO WITH ALL THAT CASH?

A big check came in from my bank today.  Normally that would be a good thing but the check is from a CD (Certificate of Deposit) I invested in last year.  I was receiving over a 7% return on the money but now the highest one year CD rate I can find are so low it barely pays for the stamp.  Money markets are paying less than 2%. And Corporate Bonds… If you can get one with a reasonable risk rating the return is under 4%.

What’s an investor to do?

Read on to learn how to create a Simulated CD with over 10% return…

 

	Click here to see what you can get for just $1. Hint.. It's one month of our Premium Service.

Now back to the steps to create a Simulated CD.

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 know of… But the paltry returns will put you in the poor house. 

That’s where something I call a “Simulated CD” comes in. And January is a great month to put this strategy to work.

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:

1. Pick a stock you think is pretty solid.  Let’s use XYZ (Our favorite fictitious stock)  for example.

2. Set a one year price target for the stock.  XYZ is now trading at around $64 so a one year price target of $74 (15% increase) would probably not be unreasonable. Last year the stock went from $30 to $67 (123% increase).

3. 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 ’03.

4. 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 next January.

For the XYZ example here’s how the numbers work out:

You buy XYZ for $64 a share and sell the JAN’03 40 LEAP for $30 a share.  The cost to you is $34 (64-30=34) a share for the stock and you have committed to sell it for $40 a share on January 18, 2003.  If the stock does not drop below $40 a share between now and then your return on this investment would be 17.6% [ (40-34)/34) ] 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 January expiration 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 $34 for you to lose money on this.  Is XYZ’s price going to drop 47% 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 #1: There are risk 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.

WARNING #2: Don’t spend all the money you should make with this strategy in one place.  Invest it in a nice gift for your spouse. How about a book from our book store?

 

	For more tools to help you Invest Smarter >> Click here

All stocks and options shown are examples only. These are not recommendations to buy or sell any security. The examples above do not take into account your trade size, brokerage commissions or taxes  which will effect actual investment returns. Stocks and options involve risk and are not suitable for all  investors and investing in options carries substantial risk. Prior to buying or selling options, a person must   receive a copy of Characteristics and Risks of Standardized Options available at http://www.cboe.com/Resources/Intro.asp.