We have just completed the first month of this Low Risk Income model portfolio. A summary of the income we have received to date in shown in the table below.
Income Tracker as at 30 April 2012 – Click on image to enlarge
To date, we have made future commitments to buy 3 different stocks (NAB, RIO and WES) by selling put option contracts. We received a total of $2,354 in premiums for these put contracts. Currently we do not own any stocks so we still have $200,000 in cash. I had to set aside $10,000 to cover the margin requirements for our put contracts and the remaining $190,000 was left to earn interest in a Cash Investment account that paid interest at the rate of 4.75%. At the end of the month, we received $741.78 of interest giving us a total income of $3095.78 or a 1.55% return this month on our capital of $200,000.
At this point in time, we do not know what will happen with the put option contracts that we sold. Some of these put option contracts might be exercised and we will buy the stocks at the agreed strike price of the option we sold. Some of the put options will expire worthless. No matter what happens, the option premiums we received is ours to keep, just like the interest we received for our cash. We can choose to spend it our reinvest it. For simplicity, we shall assume that the income in our model portfolio is not re-invested.
Over the coming months, we will continue to sell put options on other stocks. If our put options get exercised, we will use some of our cash to buy the stocks. When we own the stocks, we can sell covered calls on these stocks and we will also get income from dividends and franking credits. Our goal is to generate a similar monthly return as what we achieved this month. If we can achieve an average monthly return of 1.5%, our annualised return would be 18%. So far we have not factored in brokerage and fees in our income tracker as they vary depending on which broker we use. After deducting these expenses, we should still be able to achieve our target return of 15% per year in income received, which is what we set out to achieve when we started this model portfolio (see Model Portfolio Set Up).
I will be providing weekly and monthly updates on this model portfolio on this blog. If you are intrigued by our income strategy but have trouble following the discussions in this post, you will need to first download and read our e-book in order to understand the strategy and do some basic options education (found on our Resources page) to familiarise yourself with option terminology. A copy of the Portfolio Tracker spread sheet is also provided in our Resources area for you to use to paper trade the model portfolio along with me or for tracking your own real or paper trades.
Disclaimer: This post is for educational purposes only and should not be treated as investment advice. This strategy would not be suitable for stock investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek investment advice if required.