The Stock Option Income Generator E-Book

Harvey C. Friedentag

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Trading Series
• Sprache: Englisch

Seitenzahl: 541

Veröffentlichungsjahr: 2009

Beschreibung

A straightforward guide to generating consistent income by selling call options on selected stocks The Stock Option Income Generator outlines a low-stress approach to making predictable profits no matter what the state of the overall market. Harvey Friedentag, a registered investment advisor who has been successfully using this strategy for more than thirty-six years, shows how to pick stocks and then sell call options against those stocks to generate a constant source of income. With this book, you'll quickly learn to * Make consistent profits in the stock market and increase your gains * Protect stock holdings from price declines, cutting your losses * Profit from big market moves as well as sideways moves * Receive a controllable tax shelter from an option income portfolio * Buy more stocks for less money Friedentag's strategy is ideal for anyone who wants to generate better returns than the overall market averages, with less risk, and receive the benefits of tax-advantaged investing.

Leseprobe

Table of Contents

Title Page

Copyright Page

Preface

Acknowledgements

CHAPTER 1 - Fear and Ignorance

THE STOCK MARKET CRASH OF 1929

UNDERSTANDING INVESTOR BEHAVIOR

THE CRASH OF 2008

WHAT TO DO FIRST

MY INVESTMENT HISTORY

CHAPTER 2 - Invest with Confidence

WHAT IS INVESTING?

ASSET ALLOCATION

RISK VERSUS REWARD: FINDING YOUR BALANCE

THE THREE STRATEGIC FACTORS

STOCKS: THE LONG-TERM CORE

DEFINING INVESTING AND FEAR

MARKET MADNESS: BLACK MONDAY, OCTOBER 19, 1987

MARKET ANXIETY IS CAUSED BY MANY FACTORS

YEAR 2008: THE COLLAPSE OF THE STOCK MARKET

INVESTING AND GAMBLING

INVESTMENT POLICY STATEMENT

DISCIPLINE CAN BE REALLY GOOD FOR YOU

CHAPTER 3 - An Overview of How to Invest

INFLATION

INVESTING IN STOCKS

CONTRARIAN INVESTING

GROWTH STOCK INVESTING

COMMON-SENSE STOCK SELECTION

DIVIDEND INCOME STOCK INVESTING

KEEP IN MIND

CHAPTER 4 - Stock Picking, Research, and Annual Reports

QUESTIONS FOR INVESTMENT DECISIONS

SOURCES OF INVESTMENT INFORMATION

TRADE PRESS

INVESTMENT CLUBS

READING THE ANNUAL REPORT

THE QUARTERLY REPORT

CHANGING THE RULES

ANNUAL MEETINGS

STOCK SELECTION SUMMARY

CHAPTER 5 - How to Read the Financial News

GUIDE TO THE ECONOMY AND THE STOCK MARKET

YOUR WALLET CAN BE A LEADING ECONOMIC INDICATOR

CHAPTER 6 - The Art of Investing, Risk, and Reward

STOCKS OR BONDS?

MARKET TIMING

AVOID COMMON INVESTMENT RISKS

RISK BREEDS FEAR

GENERAL INVESTMENT STRATEGIES

THE TOOLS OF CONTRARIAN INVESTING

CLASSIC STOCK MARKET STATEMENTS

MADNESS OF CROWDS

TAKE ADVANTAGE OF THE PROS

INSIDER INFORMATION

INSIDER TRADING IS NOT ALWAYS ILLEGAL

BUY, SELL, OR HOLD?

PERFORMANCE RECORDS

INVESTING CONSIDERATIONS

TRANSACTION COSTS COMPARED

TO MAKE MONEY IN THE STOCK MARKET, DON’T LOSE ANY

CHAPTER 7 - Dividend Reinvestment Plans

DIVIDEND REINVESTING PLANS AND DOLLAR COST AVERAGING

THE COMPOUNDING EFFECT

DRPs: ADVANTAGES FOR THE INVESTOR

DRPs: ADVANTAGES FOR THE COMPANIES

USING DRPs TO SELECT STOCKS

SAFETY WITH A SMALL INVESTMENT

DIVIDEND REINVESTMENT PLANS AND THE COMPOUNDING EFFECT

THE DIVIDEND DEBATE

CHAPTER 8 - Picking and Dealing with a Stockbroker

WE INVEST TO MAKE MONEY

THE BUCK STARTS HERE

SHOCKING FACTS: IS RESEARCH FROM WALL STREET USELESS, OR WORSE?

THE STOCKS IN THE DOW JONES AVERAGES

TODAY’S BARGAINS CAN BE TOMORROW’S WINNERS, AND TODAY’S WINNERS CAN BE ...

WHY USE A DISCOUNT BROKER?

UNDERSTANDING PROCEDURES

CHAPTER 9 - Advanced Investing and Goal Setting

FINANCIAL FAILURE

YOUR MONEY

YOUR RETURN

YOUR TIME

INVESTMENT RISKS

RISK-REWARD RELATIONSHIP

CHAPTER 10 - Building Your Portfolio

HOW THE PROS CHOOSE STOCKS

BENJAMIN GRAHAM, THE VALUE INVESTOR

HOW OTHER PROFESSIONALS INVEST

VALUE VERSUS STOCK PRICE

BUYING AND SELLING STOCKS

PORTFOLIO MANAGEMENT GUIDELINES

A RELIABLE WAY TO INVEST

CHAPTER 11 - Basic Investment Guidelines

THE REALITIES OF INVESTING: MIND OVER MATTER

DON’T PANIC

DO NOT TRY TO PREDICT THE MARKET

CAPITALIZE ON STOCK MARKET ANXIETY AND EUPHORIA

REMEMBER, NO ONE BECOMES POOR TAKING A PROFIT

UNDERSTANDING BANKRUPTCY

KEY CONSIDERATIONS

ALWAYS REMEMBER

CHAPTER 12 - Options and the Stock Market

WHAT IS AN OPTION?

THE BUSINESS OF OPTIONS

OPTIONS SHARE MANY SIMILARITIES WITH COMMON STOCKS

HISTORY OF OPTIONS

FUNCTION OF OPTIONS

FACTORS AFFECTING OPTION VALUATION

THE OPTION PREMIUM

THE OPTION STRATEGY

SOME QUESTIONS AND ANSWERS

GETTING STARTED

WHY SELLERS SELL CALLS: SOME STRATEGIES

OPTION EXERCISE

OPTION FUNDAMENTALS

USING OPTIONS AND MARGIN

WHAT IS MARGIN?

AVOID THE PREMIUM TRAP

PUT-CALL RATIOS

OPTION QUOTES

SELLING OPTIONS: PRUDENT INVESTING METHOD

CHAPTER 13 - Options and Potential Returns

NAKED OPTION WRITING

STARTING A COVERED CALL PROGRAM

THE PRICING OF OPTIONS

DETERMINING THE BEST TIME VALUE

DETERMINING THE BEST STRIKE PRICE

DETERMINING THE BEST UNDERLYING STOCK

WHEN TO TAKE ACTION

UNDERSTANDING PUBLISHED OPTION PREMIUMS

OPTION SYMBOLS

THE STANDARD METHOD OF USING OPTIONS

MY METHOD OF USING OPTIONS

CHAPTER 14 - Margin: The Credit You Can Use

ADVANTAGES OF MARGIN

THE MARGIN ACCOUNT AND BUYING POWER

MARGIN ACCOUNT MAINTENANCE

MARGIN INTEREST

IMPORTANT MARGIN PRINCIPLES

OPENING A MARGIN ACCOUNT

BASIC IDEAS AND TERMINOLOGY

PORTFOLIO VALUATION

PORTFOLIO FINANCIALS

MARGIN OR MAINTENANCE CALL

CONVERTING DIVIDENDS INTO CAPITAL GAINS

USING MARGIN FOR PERSONAL PURCHASES

CHAPTER 15 - Managing an Option Income Portfolio

THE WRITING POSSIBILITIES

OPTION SELECTION FOR OPTION WRITING

SELLING TIME VALUE

SELLING A COVERED CALL OPTION

STOCKBROKERAGE COMMISSIONS

BUY AND WRITE STRATEGY (BUY-WRITE)

FORMULA FOR STOCK AND OPTION SELECTION

THE OPTION BUYER

PROOF THAT AN OPTION INCOME PORTFOLIO IS A WINNER

FOLLOW-UP ACTION

PERIODICAL REVIEW OF PORTFOLIO EQUITY HOLDINGS

OPTION INCOME PORTFOLIO REVIEW

CHAPTER 16 - Option Income Portfolio as a Tax Shelter

INVESTMENT DEFINITIONS

THE OPTION INCOME PORTFOLIO AND TAXES

OPTION CONTRACT CLOSING TRANSACTION

TAX DEFERRAL

TAX GAINS OR LOSSES

CAPITAL LOSS OR GAIN BANK

CHAPTER 17 - Options: Standard Operating Procedures

RULE OF THUMB

STOCK PRICE GOES DOWN

STOCK PRICE STAYS THE SAME

STOCK PRICE GOES UP

SELLING AND BUYING BACK CALLS: ONE STOCK FOR ONE YEAR

OPTION INCOME PORTFOLIO PROCEDURE

SO WHY AREN’T YOU SELLING OPTIONS?

CHAPTER 18 - LEAPS

LEAPS OPTIONS FOR A LONGER TERM

LEAPS PRICING

LEAPS SYMBOLS

CHAPTER 19 - Conclusions

FEAR, GREED, HOPE, AND ONE’S SELF

TRAITS OF THE WINNER

TRAITS OF THE LOSER

THE SURPRISING NEW SHAPE OF THE ECONOMY

MADNESS OF CROWDS RETURNS

THE GOOD NEWS

REMEMBER TIME PLUS MONEY FOR SUCCESSFUL INVESTING

APPENDIX - Investing in Citigroup through the Years

Resources

About the Author

Index

Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding.

The Wiley Trading series features books by traders who have survived the market’s ever changing temperament and have prospered—some by reinventing systems, others by getting back to basics. Whether a novice trader, professional or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future.

For a list of available titles, visit our web site at www.WileyFinance.com.

Copyright © 2009 by Harvey Conrad Friedentag. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rose-wood Drive, Danvers, MA 01923, [phone], via fax at [phone], or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], via fax at [phone], or online at www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at [phone], outside the United States at [phone] or via fax at [phone].

Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com.

Library of Congress Cataloging-in-Publication Data:

Friedentag, Harvey C. (Harvey Conrad)

The stock option income generator : how to make steady profits by renting your stocks / Harvey Conrad Friedentag. p. cm.—(Wiley trading series)

Includes index.

eISBN : 978-0-470-55411-1

1. Stock options. 2. Investments. 3. Finance, Personal. I. Title. HG6042.F737 2009 332.63’283—dc22 2009015534

Preface

The greatest investment experience of your life begins today. And this experience is really timely, because all the day-traders are gambling without knowing what they are doing.

Thirty-six years ago, working at my kitchen table, I started a unique endeavor for investing. Since that modest beginning, my portfolio management service has grown to be a source of personal satisfaction and income not just for me but, even better, for my clients. And this book will do the same for you.

Why? Because this book covers what I know to be the single most rewarding form of investing in existence—the covered call option.

This book is a road map. I have developed a step-by-step program to make you a successful investor, as I have made my clients successful investors. Let me lead you to the same success.

Let me open your eyes to the facts about this extraordinary investment arena. In the following pages, you will learn the basics of selecting the best stocks for covered call options.

The approach is simple. The complete strategy is easy to execute and will save you both time and money. The first chapters of the book are truly fundamental, dealing with the basics of investing. If you are already comfortable with investing, I suggest you move directly to the advanced part of the book, which tells you how to move beyond comfort to real success.

The methods discussed in this book have achieved proven results over many years. The strategies and tactics outlined will allow you to accumulate assets steadily. You can reach your investment goals within a reasonable amount of time. In studying my book you will learn:

• To heed the lessons of the past

• To invest without doubt

• To make profits in the stock market

• To profit whether the market goes up, or down, or sideways

If this is what you are looking for, read on.

When I finished my last book, Stocks for Options Trading, I thought I had written everything I could write about my approach for investing in the stock market. Then several things happened.

The first was a dramatic increase in my advisory business. This drove me to create, develop, try, and perfect my methods for portfolio enhancement—big words for getting more safety and income out of stock market investing in all financial climates.

Then we experienced the events of 2008. You cannot bring up the stock market these days without analyzing the events that have been taking place as I write this book. This has been one of the most unusual times I have ever experienced. I have always believed that investors should ignore the ups and downs of the market. Fortunately, the vast majority of them paid little attention to the distractions cited previously. If this is any example, very few of my clients switched to money market funds during the desperations of the period. When you sell in desperation, you always sell cheap, and truly realize your losses.

Whether it is a 508-point day or a 59-point day, and you are nervous about the stock market, you do not have to sell that day or the next. Maybe we are in a bear market and for the next two years or three years you will wish you had never heard of stocks. But the history of the stock market has been full of bear markets, not to mention recessions, and in spite of that the results are indisputable: A portfolio of stocks with covered call options will turn out to be a lot more valuable than a portfolio of bonds or CDs or money market funds. You could come out ahead of the panic-sellers, because the market will rise steadily eventually. In the end, superior companies will succeed and mediocre companies will fail, and investors in each will be rewarded accordingly.

To some, these concepts seem to defy logic, or at least they defy explanation. Not to me. They make sense. I do them every day, and so will you. I want to change the way you invest.

Every investor must be realistic. You must gather data, analyze them, and strive to come to logical conclusions, whether favorable or unfavorable. Optimism is a tonic. Pessimism is poison. You must become a realist.

This is a book about investing success. The complete strategy is easy to execute and is appropriate to save you both time and money by using tactics designed for you.

If the returns you receive from implementing my strategies seem to defy gravity, then great for you. Keep the gains. I get the satisfaction of knowing you are doing well.

As a registered investment advisor (RIA) with the United States Securities and Exchange Commission (SEC), I have been managing personal portfolios professionally since 1986. The methods discussed in this book have achieved proven results in the past. The strategies and tactics outlined here will allow you to accumulate assets steadily. You can reach your investment goals within a reasonable amount of time.

My point of view is that hindsight or rumor or case studies are only interesting if you can learn a lesson from them . . . that investing well is important, but what you get for the money you earn probably matters more . . . and that you don’t have much time or tolerance for clichés, familiar faces, or formulaic advice. Don’t learn the tricks of the trade. Learn the trade.

Before you take the plunge, consider that investing is like scuba diving: It is not for everyone. But both can be mastered by more people than have so far shown up on either scene. In both activities, it is essential that you be truly aware of exactly what you are doing, and that you are alert to the possible dangers as well as the safeguards available to protect you against them.

In the case of investing, your greatest safeguards are your constant watchfulness, a thorough awareness, and the investment of your time. You should allot part of that time to keeping abreast of outside influences, whether political, economic, or other trends that might affect the present and future of your investments.

I will share the real-life examples that bring my formulas to life. In this book, I give you all the details, methods, and techniques that I use daily to produce wealth. And then if that is not enough, I will share with you methods for serious tax reduction, wealth enhancement, and portfolio asset protection.

HARVEY CONRAD FRIEDENTAG April 2009

Acknowledgments

A writer writes, a reader reads. As a writer, you know who you are and what the material means to you. But you cannot begin to know who the reader will be, or what background that reader will or won’t bring to the page.

I have tried to write a book that will be useful and of value to both investors and prospective investors. It starts out simply and then grows in detail. It reflects my involvement over the years with the investment process. More importantly, however, it reflects some of the accumulated knowledge and experience I have gained as a veteran in the stock market.

To distill a lifetime of my experience and that of my friends and colleagues in investing into a book is a giant task and a near impossibility as well. Something is sure to be left out. Some readers may rise in protest, no matter how honorable my intentions. Yet I want to give as much knowledge as I can to my readers about this marvelous, exciting, fun, agonizing, ecstatic—and, of course, financially rewarding—way of making money called investing. Finally, I want you to enjoy investing.

This book won’t make you an instant expert or give you a surefire formula for making money. But it could be an important step toward taking control of your financial future. My goal is to convince and train you to be your own portfolio manager while using a method that enables you to invest without fear.

This book is a presentation of my work and the suggestions of others, gained through broadcast, the printed word, and my face-to-face real-life experiences.

Writing a book is a formidable task that cannot be appreciated until you actually begin work on it. One must summon forth a resolve and commitment that are not normally needed in everyday life.

There are not enough words in the thesaurus to thank Hal and Martha Quiat for their assistance in desktop publishing, grammar, and making me clearly state what I meant to say. They were able to divorce their own egos and personalities from the process and concentrate on drawing me out, which they did flawlessly. Bold and merciless editing to hone the material, to be sure that only the best parts of the document were included, was matched with a stubborn determination to reject anything that did not belong. Behind their engaging and gentle exterior lies a strict discipline to prohibit excess wordage. Hal and Martha’s weeding and pruning have been crucial to the presentation of this material. They gave freely of their time and talent, rearranging their workdays to accommodate mine.

Heartfelt recognition is offered to all those who let me interview them, who listened to my long-winded dissertations, and who openly shared their feelings, philosophies, and experiences about investing with me.

I have to thank some long-time friends: Stuart MacPhail got me “computerized”—or I would still be looking at a stack of indecipherable notes—edited my first drafts, corrected my grammar, helped me get my thoughts organized, and helped to get this book completed. Michael Wootan gave constant encouragement, and assisted me with the computer fundamentals and with the manuscript.

Great recognition goes to the members of the Contrarian Investment Club for using my methods and giving me their input. I thank Nate Oderberg for serving 20 years as the treasurer for the Contrarian Investment Club and spending many late-night sessions stock-picking with me. I am deeply indebted to Thomas Tolen, CPA, for helping me with the tax ramifications of covered call option investing. I also thank Guy Simone, who bounced strategies and ideas off my head, and enhanced my investment procedures.

I have to thank my friend Joyce and my family for all the long sessions when I disappeared into my office to work on this book and was not available to them.

Last but not least, my appreciation goes to Dr. Alexander Elder, who greatly facilitated getting my book to John Wiley & Sons for publishing; Meg Freeborn, my developmental editor; Kevin Commins, my editor; and Ted Bonanno, my literary agent. Thank you, all my friends.

CHAPTER 1

Fear and Ignorance

Fear always springs from ignorance.

—Ralph Waldo Emerson

Why must people have a fear of investing? Why did the stock market crash in 1929? Why was it necessary to become jobless?

Why was it necessary to become penniless?

Why was it necessary for people to leap to their deaths out of fear?

Why was it necessary to forgo the American dream?

Aren’t investors by definition fearful? With little training in investing, they tend to do nothing, or they delegate investment responsibilities to stockbrokers, accountants, bank trust officers, insurance agents, relatives, or friends—often with disappointing results. After all, no one will care as much about your financial assets as you do. No one will do the job as well as you can.

It is not an easy job. There are thousands of ways to go wrong. Even the most prudent investment decisions may not work (as we know from personal experience and the tales of countless investors). The job may not be easy, but it is doable. I have learned to invest money successfully, and so can you. It takes some study and considerable personal discipline, but you will be well paid for your efforts. This book will help you get started and guide you toward rewarding accomplishments.

The best opening lesson on fear and investing is illustrated by the largest money-losing event, and worst day of fear ever seen: the stock market crash of 1929.

THE STOCK MARKET CRASH OF 1929

The tragedy of this crash is best illustrated in the many news stories of the time, as reported by the telegraphic services of the Associated Press, , , , Universal International News, Consolidated Press, and the United Press.