The Tycoon Report

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Special Note from Chris Rowe: I am pleased to introduce one of the best options educators in the business to The Tycoon Report, Ron Ianieri, to share his take on the markets and, particularly, the options markets with you each week, starting today.

No matter whether you're an expert options trader yourself or just starting out, Ron brings a great deal of knowledge and experience to the table designed to benefit you. In addition to being a top options trader himself, Ron was responsible for training floor traders -- people who moved millions of dollars in the markets each day -- how to trade options.

Ron earned his trading stripes on the floor of the Philadelphia Stock Exchange, where he worked on both the Equity Options floor and the Foreign Currency Options floor as both a market-maker and a specialist. Ron was best known for his years spent as the Options Specialist in Dell Computer (DELL) in the early/mid-1990s when DELL was one of the busiest equity options books ever.

Ron earned the respect of the options floor for the development and teaching of his Option Trader Trainee Course. Ron travels the world teaching individual investors the same Options Class he developed on the trading floor.

In addition to serving as the Chief Strategist of ION Options, Ron is regularly seen on CNBC, CNBC Asia, Fox News, Fox Business News, Bloomberg Asia, and BNN for his market commentary. He is also frequently quoted in many financial publications and websites including CNBC.com, CNN.com, Dow Jones MarketWatch, Barron's, Wall Street Journal, ABC News and countless radio talk shows.

We are pleased to bring Ron on board to share his insights on how to position yourself for profits with options. Please join us in welcoming him to The Tycoon Report!

 

Own Stocks for 70% Off ... and Create Your Own Dividend!

Now, before you say, "Hey Ron, anyone can buy stocks at 70% off -- have you seen what this market has done to our portfolios?" there's actually a better way to control any stock -- regardless of where it was trading two years ago -- at more than half off the price of where it's trading today.

A little over a week ago, Wall Street was abuzz with the fact that the markets ended at new highs for the year. But everyone whose 401(k) got chopped in half in the last year has the right to not be impressed until they start to see some real recovery in their own portfolios, as well!

Half the Money, Twice the Opportunity

You might not have the money you used to have, but you've got to make it back. How do you get the momentum going when you only have half the money you used to?

You can't start from where you were, but that doesn't mean you can't start from where you are.

I personally don't trade stocks anymore, and if you aren't ready to let go of your stocks just yet, there are a number of strategies to help you maximize them. But when you substitute options in place of your stocks, it allows your smaller account to trade just like a bigger account.

It's Time to Kick Your Stocks to the Curb. Here's Why...

Look at a stock like ExxonMobil (XOM). It's trading around $70 these days. You could free up $50 a share by buying a call option for $20 instead.

A call option gives you the right to purchase shares at a later date. If you buy January options, you have until the third Friday in January to decide whether or not you want to buy the shares at a pre-determined price. Or, you can stay away from the stock and just close your call position at any time during the life of your option contract.

What's a contract? Options are traded in contracts, with each contract representing 100 shares of the underlying security.

Now, don't go crazy and take all the money you get from selling your stock position and creating a same-dollar-sized option position. The idea is to control the same-size stock position using options for far less money.

If you owned 1,000 shares of XOM, you'd probably be comfortable owning 10 contracts (10 contracts x 100 shares = 1,000 shares represented). You can buy one contract, three, five, 10 ... whatever is best for you. But remember how much you're actually controlling before you buy.

In this example, by buying 10 call contracts, you're controlling 1,000 shares. So right here, you have two possible positions that are controlling the same amount of shares. One is straight stock ownership, costing $70,000. In the other, you're still controlling the shares, but at $20 per share, per contract. That’s going to cost a total of $20,000 ... that’s a 70% discount off of buying the stock outright.

That’s a big difference and, further, you can mimic the stock performance by 80%-85%. So, that's where the power of leverage comes in -- spending less money to generate a high-percentage performance ratio.

Stocks vs. Options: The Great Dividend Debate

Now, you might say that you own stocks that pay dividends, and you don't want to give those up. While it's true that you don't collect dividends as an option buyer, you have an incredible opportunity to create your own dividend.

Sure, you can settle for 40 cents a share paid every quarter (or twice a year, depending on the stock) -- it's nice to receive a little check every few months. But keep in mind that a company doesn't have to pay dividends at all and, if it does, it has the right to reduce or even eliminate that dividend in order to contain costs.

What you can do instead is create what I call a "synthetic dividend." In other words, stop worrying that you'll lose out on your dividend check and start looking toward how much you can make when you take matters into your own hands.

Would You Rather Have Everyone Else's Dividend,
or One You Create That's Three Times Bigger?

XOM's dividend is currently in the 40-cent neighborhood. That's $1.60 per year, which might sound like a lot. But when you think about it, on a $70 stock, you're looking at a 2.3% dividend yield.

Now, that's the actual dividend. But let's take a look at how creating your own (synthetic) dividend can give you three times better returns.

Here's how.

Say if we took the $70,000 you spent on the stock, and we’ll take the $20,000 you could instead spend on the options. As you can see, this translates into a $50,000 cash savings -- cash that you can keep in your trading account, either collecting interest or waiting to be channeled into another investment.

With a money-market rate of around 3% a year, this $50,000 can gives you $1,500 of interest at the end of the year. That's interest you otherwise wouldn't receive with your cash tied up in stocks.

Now, taking it a step further, if you divide the $1,500 in interest by the 1,000 shares we’re talking about, in a sense, you're creating a $1.50 dividend. You've actually created a dividend out of the interest that you received by having my additional capital in your account, earning interest.

If you think about it, divide $1.50 by four, and you've got a 37.5-cent quarterly dividend here. Sure, you could get 40 cents if you owned XOM directly, but would you rather have 2.5 cents extra or would you rather have $50,000 in the bank?

One More Reason to Choose Options

For those of you still not convinced that options are a better investment in stocks, let's look at this from the standpoint of the dividend yield.

We saw how, at $1.60 per share per year on a $70 stock, the real dividend yield in XOM came out to 2.3%. But when you're generating $1.50 on a $20 option, you're looking at a 7.5% synthetic dividend yield -- three times the size of the actual dividend yield and you never had to touch a share of the stock!

So, do you want to buy stock for dividends any more? I hope not; it’s right there in the mathematics.