Do you fancy an insurance pay out?

What a funny old week it’s been. We have just entered another lockdown, the US election has kept us all entertained, and the stock market has rallied hard after its recent dismal performance. But, at FIRE Revolution, we have just kept selling stock options to bring in some much-needed income. Here’s a great example with Legal & General shares from the beginning of the week.

On Monday, I noticed that Legal & General shares were changing hands at 184p each — that’s just above the crucial support price of 180p that the stock has recently bounced off several times

Now, I’m a fan of Legal & General shares and have invested in the stock several times in the past. As you know, they specialise in the riveting world of annuities, investment management, and insurance. In other words, they are exactly the type of big boring blue-chip stock I’m happy to park my hard-earned savings in.

And, after the turmoil of the last few months they are dirt cheap. The shares are trading at a level that gives them a fantastic forecast dividend yield of 9.2%. No negative interest rates to worry about here!

So, did I jump in and buy the shares at 184p each.

No way Jose. As a smart FIRE Revolution investor, I instead opted to sell a December cash-secured put with a trigger price of 180p and was paid a total of £77.50 for doing so.

Sound good? Let me unpack that for you.

Selling puts

I entered a simple on-line transaction that commits me to buy 1,000 Legal & General shares at 180p each (for a total of £1,800) if the price falls below that point by the 18th December. I was paid 7.75p per share for the obligation.

So, if the share price breaches 180p, I will pick up the stock for less than it’s currently trading at and I get to keep the premium I was paid. In effect, that means I would buy the shares for 172.25p each instead of the already cheap 184p they are currently trading at. That’s a decent 6.4% downside buffer if you are nervous they may drop some more.

And, on the other hand if the price stays above 180p, what’s my outcome?

In that case I simply keep the £77.50. So, either outcome is pretty good.

Now, I appreciate that £77.50 isn’t going to change your life. But if you sold half a dozen cash-secured puts on Legal & General shares you’d be looking at £465 dropping straight into your account. And if you repeated that trick on half a dozen more stocks every month or two, we are starting to talk about a decent income.

That’s exactly the sort of thing that my clients and I do on a regular basis.

Third Friday Ltd are not regulated by the Financial Conduct Authority and the FIRE Revolution training programme is purely educational in nature. Under no circumstances do we provide any financial trading or investment advice. Any examples used are for educational purposes only and should never be construed as advice. We accept no responsibility for any investment losses you may incur. Please consult a financial advisor or other qualified professional if you are in any doubt as to the suitability of the strategies we teach.