A Div PRO Case Study for the “Forbidden” Income Strategy

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.
As a new subscriber to Dividend PRO, you’re probably curious about the "forbidden" income strategy that can boost your income returns to your Dividend PRO holdings.
 
After studying the special report that you received with your Dividend PRO subscription, you already know that this strategy involves selling call options "against" your actual stock holding. This strategy puts money in your brokerage account from Day One. Then you just wait for the options you sold to expire worthless.
 
I called this strategy "forbidden" because large hedge funds or mutual funds aren’t able to use it. The market is just too small. Yet, because about 90% of options are written or sold, your odds of making money using this strategy are very high.
 
There are two rules of thumb that I look for before recommending this “forbidden” strategy.
 
1)      I don’t expect the stock to go up substantially between now and the expiration of the option.
 
2)      The company is generating enough cash so that its current high yield is not in danger.
 
This week’s Dividend PRO meets both of those criteria through Telefonica SA (TEF).
 
Telefonica is the leading mobile phone, data and Internet services provider in Spain. Thanks to a substantial drop its in price over the past year, the stock is also now yielding 10.1%.
 
Here’s why I think it’s a terrific candidate for our “forbidden strategy.”
 
Even though Telefonica is based in Spain, the company gets more than two-thirds of its revenues from fast-growing Latin America. Telefonica Brasil is a particularly strong performer in its portfolio. That means Telefonica is shielded significantly from the economic problems in its home country.
 
Meanwhile, the long-term outlook for growth in mobile phones and the Internet remains bright. Increasing smartphone penetration also is increasing its revenue per user. So despite its current challenges, Telefonica is going to be around a long time.
 
Second, as you see from the chart below, the stock has strong, long-term technical support in the $16 to $18 range. 
 
Telefonica didn’t move much in the recent stock market rally. Nor do I expect it to move much either up or down over the next six months. That makes Telefonica an ideal candidate for the “forbidden” income strategy.
 
Finally, despite its challenging business environment, Telefonica generated a record high cash flow level last year, up 9.5%. That cash flow is a strong indication that its current high dividend is safe.
 
So buy Telefonica SA (TEF) at market today, and place your stop at $15.00.
 
To implement the “forbidden” income strategy, sell one September $17.50 call option contract for each 100 shares of Telefonica that you buy. Based on the most recent prices, that will put an extra $39 in your brokerage account for each option contract that you sell. That gives you another 2% plus in yield between now and September for every 100 shares of Telefonica you own.
 
Disclosure: I hold Telefonica SA (TEF) in my own portfolio and I expect to implement the option strategy I am recommending to you in the coming days.

Portfolio Update 

Navios Partners (NMM) pulled back 1.20% this week. The company’s cash flow situation continues to be very positive, and your dividend yield of 10.7% remains safe. NMM is a BUY.
 
Hospitality Properties Trust (HPT) powered ahead 2.62% this week. Despite the “noise” of renovations in its properties this year, this income vehicle is going from strength to strength. I would not sell anymore covered calls against HPT, but the stock remains a BUY.

Seadrill (SDRL) ended the week where it started. With Morgan Stanley upping its price target on Seadrill to $51.00 just a month ago, SDRL remains a BUY.

 
Vanguard Natural Resources (VNR) dropped 4.05% this past week. The company announced plans to offer $300 million in senior unsecured notes due in 2020 with its subsidiary, VNR Finance Corp. It plans to use the proceeds from the offering to repay debt. The stock is oversold on a short-term basis and remains a BUY.

P.S. Please join me for the Las Vegas Money Show, May 14-17, at Caesar’s Palace. To register, call 1-800/970-4355 and mention priority code 026655 or go to NicholasVardy.lasvegasmoneyshow.com. I also encourage you to sign up for my hedge fund seminar, Wednesday, May 16, 9 a.m. – 11 a.m.

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The market may be in correction mode, but your Bull Market Alert option gains continue to come hard and fast. You now have eight triple-digit gainers in the first three months of 2012.
 
First, take your 143.94% gains in your Intuitive Surgical (ISRG) April $470 call options. Hold on to the stock, as it has one of the best-looking charts out there.
 
Second, I'm recommending that you sell your remaining May $85 ca

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