A reader from Ontario gave me this idea for a headline. He was talking to some people about selling covered calls on stocks and his imagination gave him these words: How would you like to have cows that have 12 calves per year?
Of course they didn’t know what he was talking about. But readers of our newsletter StocksTalk do know that they can bring in cash each month year round by selling covered calls on stocks we own. (I call it renting out our stocks.)
With this strategy we can make money four ways with the same stock: 1) collect money each month by selling the covered call; 2) keep the dividend; 3) manage the covered call so we capture a lot of the capital gain if there is some; and 4) sell puts and bring in extra cash. This last way is for more experienced sellers. Warren Buffet apparently does this often.
My LIRA made money in 2008
One of my significant accounts holds the money United Grain Growers paid me when they paid out my pension plan. The money is locked up in what was called a Life Income Retirement Account (LIRA), which I converted to a Registered Retirement Income Fund (RRIF) when I retired from Grainews. I manage this account just like a self administered RRSP so I can own stocks, sell covered calls and buy puts in that account.
As you know, 2008 wasn’t very kind to stocks and two thirds of the money in that account was in stocks all year. But from February on I was selling covered calls on about $300,000 and collecting around $10,000 of cash per month. A lot of that $10,000 was on stocks inside my RRIF.
Let me be very clear: We made mistakes, we owned options on falling stocks and stocks dropped in price during the year, as you know. But because we kept selling covered calls and collected cash month after month, the overall value of the account stayed about level all year. The cash from the covered calls offset my mistakes, my falling options and dropping stocks.
In fact, about July I told readers of StocksTalk that I wondered if I could “beat the bear” by selling covered calls. I guess it worked. Too bad I didn’t learn this strategy years ago. But that’s life.
Normally we would have sold our stocks when the Moving Average Convergence Divergence (MACD) indicator started to turn down, but I didn’t do that because my account stayed right up there as I sold covered calls. So while many stocks dropped like a rock, and many people suffered losses of 25 per cent or more, our big account stayed right up there.
Selling covered calls can work for people who want to create cash flow, and making $1,000 a month is very easy to do. Selling covered calls might raise the value of your accounts faster than just waiting for the market to rise because calls can bring us two to three per cent returns in cash month by month and we can raise the strike price if we learn how to manage those covered calls. We can sell covered calls in an RRSP, in a trading account, in the new Tax Free Savings Account (TFSA) and in other sheltered accounts.
And we keep the dividends.
Some people say this market is going to be like a big “L.” It has already dropped like the vertical part of the L, but might go sideways for some time. I don’t know and there isn’t much we can do about the market. But we can manage our affairs so we bring in extra cash just in case the market itself wants to stay flat.
Plus, there’s a good chance many companies will cut dividends in the coming months because yields are way above the interest rates of the day and earnings could be down, so why not cut dividends and conserve cash.
U. S. T-bills pay 0%
As I start this article in early December, the U. S. just sold $32 billion worth of bonds at zero rate of interest. In other words, people were scrambling to lend the U. S. government money for free. There were buyers for almost three times that much. With good demand for U. S. dollars, the U. S. currency held its value against the Euro and other currencies. That may change by the time you read this, so be careful.
The four-week bonds paid zero interest. People were prepared to give up any interest income to get the safety of the U. S. dollar. I suppose it’s much like keeping money under the proverbial mattress.
Gold in an RRSP
If you think gold is going to go up in price, there is a way to put gold into your RRSP so you can claim it as a contribution to your RRSP. The Canadian broker Questrade can do this for you. Go to and on the home page find the words “new accounts.”
I don’t have any accounts with Questrade because all my accounts were at BMO and I’m too lazy to change. The value of the gold becomes a tax-deductible contribution, and it will be stored with the Royal Mint for a small fee.
Tax Free Savings Account
As of January 1, 2009, Canadians over 18 can start a Tax Free Savings Account (TFSA) where they can deposit up to $5,000 per year. Any money they make on that money will be tax free. I think