- Published on Tuesday, 19 June 2012 09:00
- Written by Zachary Scheidt, Editor, Hedge Fund Strategist
- Hits: 490
Last week, I spent a few days vacationing with the family at Sea Island, Ga.
If you've never been to this five-star Atlantic Coast vacation spot, you really should put it on your list of places to visit. The island is just a five-hour drive from Atlanta (my hometown and the hedge-fund capital of the Southeast), and offers a tremendous experience both for young families and professional/retired couples.
Sea Island hosted the 30th G-8 summit in 1997, and you can actually walk through the boardroom where George W. Bush, Jacques Chirac, Vladimir Putin, Tony Blair and other dignitaries sat.
One of my most memorable conversations from last week was with a financial advisor who owns a "condo" on the island. Now, I should note that this condo has vaulted ceilings, granite countertops, spacious sitting rooms and so forth.
Although he owned the title to the condo, the man I chatted with was actually taking a week's vacation and renting a less luxurious "cottage" on the island.
When I asked him why he wasn't staying in his OWN property, he let me know that this property was being used for income -- that he was much more interested in renting the property out to the CEOs and their families who were coming to the island for the weekend.
This is exactly how truly wealthy investors look at their assets.
Having a five-star beachfront condo may be a wonderful thing to enjoy, but this businessman was much more focused on the income this asset created for his family.
Creating Income From Your Investment Assets
Similar to my friend's focus on creating income from his real estate assets, many hedge fund managers (and smart individual investors) create income from investment assets (stock positions) they own in their brokerage accounts.
The "covered call" strategy is a great way to generate income from a position you already own -- or even a strategy you could use to buy stock and create more income from the position.
When investors enter a covered call transaction, they first buy stock in 100-share lots. The 100-share unit size is important because they are going to turn around and sell option contracts to create the income. (An option contract covers 100 shares of the underlying stock.)
After buying the stock, an investor can SELL a call contract that has a particular strike price and a particular expiration date. For instance, my Hedge Fund Strategist service recently bought 100 shares of Allied Nevada Gold Corp. (ANV:AMEX) and sold the June 30 calls against this position.
If you sell a call contract, you are giving someone else the right to buy stock from you at a particular price. In this case, the buyer of the calls had the right to buy 100 shares of ANV from us at $30.
Selling the call contract creates income for your account. (Remember, whenever you sell something, you receive a payment.) We received a very attractive dollar amount for selling this call contract.
Allied Nevada was a gold stock I believed had a bright future in front of it. I wanted to own the stock and expected it to trade higher.
But rather than just sit and wait for the asset to increase in value, I sold the call contract to give myself income while waiting. Of course, I had to give up some of the potential long-term return (remember, the buyer of the call contract had the right to buy stock from us at $30), but I also received a healthy amount of income for giving up that potential return.
Keep in mind, even if I sell my original ANV stock to the investor who bought my call contract, I can still go back to the market and buy more stock if I continue to like ANV.
Next week we'll talk more about the choices we have when call options expire. Often we have the ability to create MORE income, or find new opportunities with strong income potential.
The bottom line is you can create income from your investment portfolio. In my Hedge Fund Strategist service, we are constantly adding new income plays and managing the income positions in our portfolio.
Just like my friend who owns a luxurious beach condo on Sea Island, it's not enough just to "own the best" stocks or real estate properties. You need to be able to embrace a strategy that creates income from your strongest assets.