You may not like what I'm about to say, but the fact of the matter is that if you want a "true" retirement... The kind where you sleep well at night, travel freely and still have money left over to help out your kids and grandkids... It's very unlikely that you'll be able to generate enough income for that lifestyle through simply stocks and bonds.
Let's say you collect Social Security, but you estimate that you'll need an additional $45,000 a year in income to maintain a comfortable standard of living in your golden years. That means, with a $250,000 portfolio, you'd need to generate around 18% annual returns just to pay yourself without losing any capital. With a $500,000 portfolio, you'd need about 9%.
If you have more than that, you're in a better position, but there are still many future costs that could drain your nest egg in a hurry.
But what if I told you that there's a way to earn additional income -- as high as, say, $1,400 a month -- from stocks you already own? Even better, what I'm about to tell you is one of the safest income-producing strategies around, and it's been used by people "in the know" for decades.
Before I reveal exactly what it is I'm talking about, let me give you an analogy...
Most people would think it foolish to own an investment property and not rent it out. After all, if you owned an $80,000 apartment in Boston, Houston or Seattle, you'd be able to collect about $500 a month in rent, depending on the neighborhood.
Sounds like a no-brainer, right?
Likewise, if you owned $80,000 worth of stock in companies like Apple, Facebook or Intel, you could essentially do the same thing. That's because the stocks in your brokerage account can also generate monthly income, much like a rental property. But unlike with real estate, most people don't take advantage of this with their stocks.
When you think about it this way, it's utterly unbelievable that more people aren't doing this.
The good news is that collecting additional income on your stocks isn't difficult. In fact, you can do it with blocks of just 100 shares, with nearly every stock listed on the Nasdaq and the NYSE.
See, many investors simply hold stocks in their investment accounts and hope that their dividends and capital gains will be enough.
But you can do better than that by using an incredibly safe strategy that lets you make a deal with other traders who want to pay you cash upfront -- money you can funnel into your brokerage account -- for the opportunity to buy your stock from you at a higher price.
To be absolutely clear: Someone will pay you cash for the opportunity to buy your stock at a higher price than it is trading for today. You also get to set the price at which you would be willing to sell your shares. If the shares don't trade for that agreed upon price within a certain time frame then you get to keep the cash they paid... and your shares.
Sounds too good to be true, right? Don't be fooled: it's real and it works. I use this strategy myself to generate extra money for my day-to-day living costs. It can cover your monthly bills... medical expenses... even provide you with additional income for the things you otherwise couldn't afford, like taking lavish vacations.
However you choose to use this money, it's one of the safest ways to generate extra income from the stocks you already have in your portfolio. In fact, I can't think of a better strategy for retirees looking to boost their income.
Lower Your Risk, Boost Your Income
The strategy I'm talking about is an "options" strategy. But don't worry, it's completely unlike any risky options trading you may have heard about.
In fact, this strategy is the main risk reduction technique used by wealthy people and professional money managers to safeguard their wealth. For them, the main purpose is to reduce the risk of holding such large quantities of stock. The fact that this strategy also produces income in the process is an added bonus.
But for ordinary investors like you and me, both of these benefits are equally important.
Like I said, this is an especially great source of money if you're retired, approaching retirement, or just want to boost your monthly income. Even The Wall Street Journal says, "[It] generates income and can juice your returns in any market."
The technique is called "selling covered calls" or "covered call writing."
Here's how I explain covered calls to new readers of my premium newsletter, Maximum Income.
A call option is simply the right -- but not the obligation -- to buy a stock at a specified price before a specified date. Selling a covered call obligates us to sell that stock to the call buyer if it moves above a specified price (the option's "strike price"). When we accept that obligation, we receive instant income upfront (known as a "premium"). You can be asked to sell the stock at any time between the moment you collect the premium and the expiration of the option contract. To minimize risk, we will only sell calls on stocks that we own 100 shares of -- that's what makes it a "covered" call.
Now perhaps the best way to understand how this works is to give you an example.
My Maximum Income readers and I recently made a covered call trade on Bank of America (NYSE: BAC).
If you want to know why I like owning the company in today's environment, then I encourage you to read this essay I recently wrote in StreetAuthority Daily. But suffice it to say, with interest rates on the rise, I think the major banks -- and BAC in particular -- are poised to do well for investors.
There is, of course, just one problem. At a yield of 2%, the income produced from owning BAC leaves a little more to be desired for most investors. That's where covered calls come in.
Also keep in mind that I did not reveal the exact details of the trade in that StreetAuthority Daily piece. That information is normally reserved for my Maximum Income subscribers. I am, however, going to make an exception today, so you can see exactly what I mean when I say it's the best bet for investors looking to supplement their income.
My Recent Trade On BAC
When I originally issued this recommendation, BAC was trading around $25.50. So I recommend that my Maximum Income readers buy 100 shares of BAC and then sell one BAC Dec 27 Call for every 100 shares of BAC they purchased. That's a call option on BAC with a strike price of $27 that expires on Dec. 15.
At the time, the BAC Dec 27 Calls were trading around $0.28 per share. The goal was to enter this trade at a cost basis of $25.45 or less. Your cost basis is simply the price you purchase shares at minus the premium per share received when selling the call.
Keep in mind, it's possible that both the stock and the call option will be trading for slightly different prices than what you see in the trade example below; that's OK. As long as you can enter this trade for a cost basis below $25.45, I recommend executing the covered call trade. (BAC shares have bounced upward a bit recently, but the stock could pull back a bit and allow you room to enter this trade.)
This call will obligate you to sell BAC at $27 a share if the stock trades above that on Dec. 15 (the last day these options can be traded).
This December, BAC is expected to pay a quarterly dividend of $0.12 per share. While this dividend has not yet been officially declared, over the past four years, BAC has consistently set the record date for very early December -- usually the first few days of the month -- and I have no doubt that we'll see the same pattern this year. An early December record date would occur before our option expires. Since we'll already own 100 shares of BAC at that date, we'll qualify to receive the distribution payment regardless of whether our call option eventually expires worthless; as such, I'm including it in the total income this trade will generate.
If the option expires "worthless," then that's a good thing. Assuming BAC trades for $27 or less on Dec. 15, we'd keep the $40 we received from the premium and distribution on $2,550, earning 1.6% in 64 days. If we can repeat a similar trade every 64 days, we'd earn a 9% return on our capital in 12 months.
If BAC trades above $27, then our shares will be called. In that case, we will sell the shares for $27. In this case, we'd realize a profit of $1.67 per share ($27 minus the $25.33 cost basis), or $167 per 100 shares. This is a profit of 6.6% in 64 days. If we can repeat a similar trade every 64 days, we'd earn a 38% return on our cost basis in 12 months.
I know there are a lot of numbers I threw out there, but hopefully you understand that what we're essentially talking about here is a "win-win". Either a potential 9% yearly income stream on a stock that only yields 2%... or a 38% return in 12 months.
Frankly, I'm happy to take either. That's why thousands of investors have joined me over at Maximum Income. Like you, they're not content to simply accept the income offered by traditional stocks and bonds. Honestly, in this low-rate environment, it's just not going to cut it.
That's why I'm happy to tell you about my research report, which explains how covered calls work, and how you can use it to generate hundreds -- even thousands -- of dollars per month, no matter whether the stock market is moving up, down or sideways. And if you decide to give Maximum Income a risk-free trial, I'll also send you a full slate of reports with step-by-step guides and in-depth research on how to execute this income-producing strategy. If you'd like to learn more, simply go here.
This article originally appeared on StreetAuthority.