Cash Flow Trader Blog: The Ultimate Dividend Part 1
A Multi-Step Strategy That Can Maximize the Value of Your Stock
People often compare trading options to real estate investing, and like real estate investing, options trading can be an incredible money-making opportunity. The trick is to have the right cash flow strategy in place, and my favorite options strategies of all time is the Ultimate Dividend.
The Best Deal Ever
Imagine you want to buy a vacation home somewhere beautiful and peaceful. But then the deal gets even better as your real estate agent is going to pay you for closing costs. That is right; you're going to get paid to buy the house. Of course, you still must pay for the house, but the cash you receive for closing costs will help cover some of the cost of the house. That is huge win #1.
Your good fortune continues; not only did you get paid to buy the house, but you bought the most magical property in the world because the government is going to pay property taxes to you! Just for owning the house, you will receive some cash every quarter for as long as you own the property. That is huge win #2.
And there is still one more thing, the property is great, and you are already getting paid to own it, so why not maximize your cash flow and rent out the property? You do a rent-to-own deal on the property to a lovely newlywed couple. Each month, they pay you to use the property, and at any time, they can buy you out, which would put a big chunk of cash in your pocket that you could hypothetically use to repeat this process again and again. If the couple never buys your property from you, you keep receiving your two income streams on the property year in and year out. That is huge win #3.
3 Steps to Superior Cash Flow with Options
From the perspective of real estate investing, the situation described above especially wins #1 and #2, are obviously too good to be true. But traders use this exact strategy in the stock market all the time. Enter, The Ultimate Dividend Strategy, aka, the options trader's secret to starting with just a few thousand dollars and making an immediate profit. Just like the imaginary real estate example above, the Ultimate Dividend strategy involves three different steps, AKA three different huge win opportunities for cash flow:
- Find a dividend-paying stock you want to own. Like in our example above, the dividend is money you can receive every quarter just to own a particular stock. Dividend.com is a good resource to find these stocks.
- Every month, sell a cash-secured put option on the dividend stock until you are assigned the stock. Once the stock is put to you, you immediately begin collecting dividends on the stock as long as you hold it. Selling put options on a stock, you want to own is like being paid for closing costs when you buy a house.
- To maximize your cash flow, you can sell a covered call option against your recently acquired stock every month. This is like doing a rent-to-own deal on your house: Every month, you collect the premium or rent on your stock, and if the stock price goes up enough, you get to sell the stock for a healthy profit.
Cash in Your Jeans
As cash flow traders, we are focused on money coming into our accounts every month. That is what makes the Ultimate Dividend such a powerful strategy. To compare it to real estate investing, when a cash flow investor buys a property, we do not care if the property goes up or down in value because we are not there to flip the property for a quick buck. We are there to bring cash into our pocket month after month.
If the market dips low enough, it is technically possible that we may have a hard time finding renters for a while. By the same token, if the house's value skyrockets, we could potentially cash in on a huge payday and use that money to buy new houses. Most of the time, though, we are completely ambivalent about the market's ups and downs because we are receiving rental income either way.
In Closing
Now that we understand the basic elements of this strategy, check back next week as we break each step down, so you know exactly how to execute it in your own portfolio. Plus, we will share tips and best practices to help you get the most out of this strategy and even warn you of pitfalls to avoid. See you then!
