We keep a Portfolio Margin account allowing us to sale Puts against stocks (value stocks in our case). Portfolio Margin allows 6x buying power; thereby, allowing us to keep 1/6th of the money in the account compared to what we may obligate ourselves to. We never cross a threshold of not having that other 5/6ths available to us via LOC’s setup against real estate. In fact, we trade by deploying tranches of money (1/6th at a time).
We start by obligating 1/6th of funds allocated with close Near The Money Put Sales. If we use Verizon as an example, today (July 12, 2021), it closed at $56.15. A Put Sold with a Strike Price of $56, pays premiums of roughly $0.49 with expiration on Jul 23, 2021. That’s a .00875% return in 11 days or 29% annualized. If it drops below $56, we take the position and sale calls. If it’s still close to the money, we can continue the same level of return through call premiums. If we’re still holding on the ex dividend date, it’s paying approximately 4.48% annualized dividend, icing on the cake.
If the stock falls deep below due to overall economy and we don’t see a company specific justification (like fraud or business implosion), the calls may be too far away from the money to keep up those levels of returns. In that case, we deploy another tranche of cash (1/6th) to sale Puts against.
We view our approach as an ultra conservative approach. With only deploying 1/6th of the money initially, our 29% return is really only 4.83% when compared against the total funds available (6/6ths). The beauty of the approach lies in being able to add these returns to the debt free rental real estate returns being obtained (approx 11% after adding appreciation and subtracting vacancies, maintenance, evictions, property management, taxes and insurance), bringing total returns to 15.83%.
