Beginner Stock Investing Strategy
Today we’re going to walk through a beginner stock investing strategy. We’re been trading UPS lately and we currently own 300 shares in this portfolio. We’ve worked our cost basis down to $90.38 per share. With UPS trading around $96 today, we’re in a profitable position on this stock investment. Here is a link to a post that covers our trade on UPS that expires today. For more detail check out these links to our most recent posts discussing our weekly option trades on UPS.
UPS goes ex-dividend on Monday, so we’re going to collect another $1.64 per share on the shares we own in our portfolio. That will reduce our basis down to $88.74 per share. Since UPS is trading at $95.98 right now, we’re currently profitable by $7.24 per share. With 300 shares in our portfolio we’re profitable by 300 x $7.24, or a little over $2,100 so far. We have room for about $60,000 worth of UPS in this portfolio and our current allocation is $26,500. So we can be pretty aggressive with our next option trade to generate passive income trading UPS. We’ll use a beginner stock investing strategy to create cash flow.
Now we’ll walk through a beginner stock investing strategy that can give you consistent weekly income. At a high level, we find a company we want to own that is trading near a price we’re comfortable buying shares. We sell a cash secured put option contract just below the trading price and collect option premium. If the trading price stays above our strike price through the expiration date our put option contract will expire out of the money. We’ll keep the option premium, then sell another cash secured put option contract the following week. We’ll repeat that process several times. If the trading price stays above our strike price we’ll continue to collect the option premium as consistent passive income. If the trading price drops through our strike price we’ll buy shares at the strike price.
Once we own some shares of the company we’ll continue to sell cash secured put option contracts at a strike that is below the current trading price. We’ll also sell covered calls on a portion of the shares we just bought. We’ll sell those covered calls at the assignment strike price. That way we’ll create consistent cash flow each week from the option premium selling the covered calls. We’ll also create passive income selling the cash secured put options. If the trading price rises up through our covered call strike we’ll make money selling those shares because of the option premium we collected on both the put option and the covered call option on those shares. This link gets into more detail on how this beginner stock investing strategy works.
Back to UPS, we’re going to sell to open the cash secured put option for next Friday. That’s the 11/21 expiration date. Our put option at the $91 strike will expire worthless out of the money at market close today. That means we’ll have access to that capital again, and we want to use it effectively for at least the next week. When we sell to open a put option we’re making a promise to buy shares of the company at the strike price. So we need to be sure we’re comfortable buying shares of the company at the strike price we choose for the option contract. We also want to be sure we’re creating a high enough level of return on the trade to make it worthwhile. We like to target an annualized return of 20% or greater with this beginner stock investing strategy. Here’s how we do that.
We can see on the price chart below that UPS is moving in an upward trend. We can see a resistance level around $95 and another around $93.85. There’s also a resistance line at $93 with the closing price from 11/10 and also the opening price back on 5/7. So with the upward trend channel and a few soft resistance lines we’re comfortable selling a put at the $93 strike or lower. We’re only selling this put because we’re happy to buy shares of UPS at this strike price, and we’ll be adding shares to our position if we buy the shares. We could also adjust the position if the trade goes against us and we decide not to take the shares.
We can see on the option chain below that the $93 put option for the 11/21 expiration date is trading for $0.73. Today is 11/14, so this trade will be active for one week. There are 52 weeks in a year, so in theory we could do this trade, or a similar trade on another company, 52 times over the course of a year. That make 52 our time multiplier. Then we divide the $0.73 in option premium by our $93 strike price. That gives us 0.0078. Then we multiply that by our time multiplier of 52 and we get 0.408. That’s an annualized return of 40.8%. That’s much higher than our minimum target of 20%. We also have the trend line and a few softer resistance levels all going in our favor. If the trading price drops we’re ok buying the shares, so we’ll go ahead with this trade.
Weekly Option Trade Recap
We sold to open the $93 cash secured put option for the 11/21 expiration date. We brought in $0.73 per share in option premium, which gives us an annualized return of 40.8% on the trade. That brings our basis on UPS down to $88.49 per share, including the dividend. Here’s the option contract return calculator we use. And here’s the trade history template we use to track our basis per share. This beginner stock investing strategy can create consistent cash flow.
