It may be a stupid question, but let’s see how you might be able to do it. Better, let me show you what I am doing in a real example. I’m not suggesting that you do this, but it’s what I’m doing since I have to live on my portfolio and you may or may not have to do the same.

I bought a stock in the middle of June, that was identified in my stock analysis software. I hope to have it ready for sale soon. I’m still testing it, and I may or may not release it to the public. But that’s another blog post. My actual purchase date was June 12th, 2012. The stock was Riverbed Technology Inc. (RVBD). I put in an order and got filled at $16.76 per share. I bought a 100 share block.

For this particular income strategy, you have to buy in round lots of 100 shares. On June 13th, 2012, I sold a call option for Riverbed Technology for September 22, 2012 at $18. What all this means is that I sold a contract between me and a purchaser that I will sell my 100 shares of RVBD between June 13 and September 22 for a price of $18 per share. When I sold this option contract, I got a cash deposit into my account of $1.45 per share or $145.

There are two things that could happen. (1) The stock goes up and goes over $18 by September 22nd, 2012. Let’s say the stock goes to $20. Then I am contractually bound to sell my stock in RVBD at $18. Let’s look at the numbers. I bought it for $16.76 and I have to sell it for $18.00 giving me a profit in three months of 7.39%. I am not making 7.39% any place else, are you? But that’s not all. I also got $1.45 for each share or $145 ($1.45 x 100). When you add the $1.45 to the $18 you get a total $19.45 that I would make on 100 shares of RVBD. When you subtract the purchase price of $16.76, the profit is $2.69 per share or 16.05%.

That’s the profit in three months between June 13 and September 22. If the above happens, and I have to sell my shares, then on September 24 I buy another 100 shares of something else and do it all over again. OR Here is the the other thing that could happen. (2) The stock price stays the same or goes down by September 22nd. If it stays the same (which is what I really hope) then on September 22nd, 2012, the price is about $16.75. At that time, the option will expire and not get exercised since no one is going to want to pay me $18 when the stock is selling for $16.75 on the open market. So on my investment of $16.76, I made $1.45. $1.45 on $16.76 is 8.65% for three months.

Then on September 24th, I do it all over again. I hope that I can get $1.45 per share on the RVBD call option sale or $145 and that the price does not go up or down. Then I’ll make another 8.65% for three months and do it again. I like this better since I have the chance to make 32% per year assuming that the price of the stock does not go up or down.

What if the price goes down? Well it could go to $15.31 and I would still break even. So how does that work? Well $15.31 + $1.45 = $16.76 which is the price I paid. On September 22nd, 2012, I am betting that the price will be about $16.76. I’ll make 8.65% and sell another 3 month option for around $1.45.

Wish me luck! I’ll let you know how it goes on September 22nd, 2012.

For Taking Early Retirement (TER), I hope you are enjoying a great retirement or are close to the day when you can retire!

Jeremiah John