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Who’s the CEO of YOUR PORTFOLIO INC.?
I wonder how many investors run their stock portfolios
like a well-oiled, cash-generating, business? That’s right,
I’m talking about the classic Widget Company of MBA school
lore. In a Widget business, assets -- people, property,
and equipment -- produce goods that are sold to generate income.
Asset values vary over time while income generation (and real profits)
is most important.
Read on to learn more about running your portfolio
like a business…
Most people just manage their stock portfolio’s
balance sheet, concentrating on buying and selling assets to increase
portfolio value. This was right for the roaring 90s but now that
we’ve all washed up on the beach of a new investing world,
we need a different way to count our investment winnings.
Why not treat your stock holdings like assets
(people, equipment and property) and think like you are the CEO
of YOUR PORTFOLIO INC.? Your job is to generate the most cash from
your assets.
The Widget Company CEO wouldn’t even
consider selling his machines or property (assets) to generate cash.
The company would go out of business.
To generate cash from your stocks, you use
equity call options. With covered calls, you sell the right to buy
your stock at a set price (strike price) before a certain date (expiration
date). You get paid for this right in cash, today. If the stock
doesn’t hit the strike price, you sell another option.
Let’s say YOUR PORTFOLIO INC. owns shares
of Microsoft, Cisco, and UPS. You can worry about how your twelve-month
portfolio value (the asset) is down or you can generate cash from
your assets. The Widget Company CEO wouldn’t let his assets
stand idle when customers will pay cash for widgets, so why should
you?
Microsoft, Cisco, and UPS are solid companies.
Their value will probably return. But now you can generate thousands
of dollars every month by selling out-of-the-money call options.
For example, with MSFT stock hovering around
$60 you could sell an $70 call option and collect around $1.00 for
each share. Even if MSFT exceeds $70 there are ways to bank more
money while retaining your stock and bumping the strike price up.
With profits on the rise, give yourself a
big bonus and more vacation time… Hey you’re the CEO,
right?
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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.
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