Posted on January 18th, 2010 
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The Income Strategy is an extremely powerful portfolio strategy that incorporates a combination of Stock and Options. It is designed to produce a consistent monthly income while providing capital protection for the portfolio.
The Income Strategy is very popular Investing Strategy with Self Managed Super Fund (SMSF) and longer term wealth building individuals.
This is an Income Strategy Recommendation for investors looking to buy TLS shares at a discount to market. The recommended trade is to sell put options on TLS with the intent to purchase the shares. This recommendation is designed for investor looking to generate monthly income with capital protection. Instead of buying TLS shares today at market at $3.37 we can place this trade which gives an equivalent entry price at $3.21 a discount of 4.75% and a price I am happy to buy the shares at. This trade incorporates 90% Capital Protection. Short-term traders can place a bull put spread, please contact us on 1300 368 316 for more information on this trade.
Trade
- Sell 10 contracts TLS February 2010 $3.36 Puts @ 16.5 cents
- Buy 10 contracts TLS February 2010 $2.89 Puts @ 1.5 cents
Net Credit 15 cents
Shares per contract = 1040
Trade Summary
Maximum Profit - $1560
Maximum Loss – $3,328
Breakeven - $3.21
Return on Share Value - 4.46%
Annualised Return on Share Value – 26.76%
Return on Risk (ROR) – 46.88%
If exercised we will purchase 10,400shares at $3.36 which is a trade value of $34,944. When entering this trade you need to be aware and able to purchase the shares if exercised. If this is not possible the bull put spread recommendation an alternative trade idea. For more information on the trade, refer to our fundamental analysis on TLS.
Dividend
Telstra goes ex-dividend early March so by selling a put that expires in February before the ex-dividend date means that if exercised we will be entitled to receive the dividend of 14 cents or 4.17%. This increases our chances of not being exercised and receiving the maximum profit as share prices tend to increase before ex-dividend dates. However if exercised it is not a bad thing as we receive the high yield dividend and call sell calls to produce a large % yield in March.
Reason for Trade
- Technical Analysis – TLS is a buy at these levels with strong support at $3.30 and our breakeven is below this level.
- Fundamental Analysis – We have a bullish view on TLS long-term please see this mornings Daily Grindstone and the attached research for more information.
- Increased returns due to high yield dividend and happy to be exercised.
- Return on Risk very high being above 30% and close to 50% Return on Risk
- Capital Protection at 90%
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