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5 Rules of Earning Steady Return from Stocks

I was thinking of how one can use current economic turmoil and depressed valuations to earn steady return from stocks. Following applies only if you are optimistic about overall long-term trend that things would recover. If you are pessimists, this does not apply - I would recommend keeping money under mattress (since you may not even trust any banks:-)

  1. Buy stocks of companies which you believe are going to survive and would not declare BK. This is easier said than done since no one believed that Lehman, Washington Mutual would go BK
  2. Buy stocks on days when these companies get penalized (go down by 50% in one day) due to some short-term market issues. Some examples would be HIG below $5, HUN below $3, GNW below $1, MS below $8, DRYS below $4 and so on. You need to be patient and buy only when such opportunities are presented. I always believe that markets are in-efficient in short-term
  3. Buy in quantities. 2000 if stock is below $2, 1000 if it is below $5, 500 if it is below $10. Basically invest about $5000 in one particular stock.
  4. Check out the volume in the stock. Daily volume needs to be at least 1 Million shares
  5. Once you have bought the stock, sell slightly out-of-money covered calls for immediate month (e.g. sell Jan 09) . For example, if stock price is $3-4, sell covered call with strike price of $5. Typically such contracts would be selling for 25-40 cents which would earn you about $250-400 (assuming you have 1000 shares and selling 10 contracts). Hopefully these contracts would expire worthless and you will keep your premium. If stock does go above $5, you would still benefit. Keep on doing this every month
This way one can keep the stock and earn steady returns (like monthly dividends) from your holdings. Most important rule above all is DO NOT do this on margin !

Good luck and good night !

/Shyam

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