Cathy's Blog

While skipping down the road of life with Cathy playing tennis, eating DQ and watching Mel Brooks movies, I was blind and in heaven. I mean what’s better than a few hours of tennis with a cutie pie in a pony tail, an ice-cream cone and then Space Balls, Stripes, Caddy Shack, etc.? Fun times for sure. Then I began to think, how can I support this habit of tennis all year long? Club membership and court time in the winter can be costly. I picked the right sport, wrong career. Then poof! The idea of being a property owner, a landlord popped into my head. I could use the rents I collected to pay for my tennis and ice-cream habits all year long. Yes, I love ice-cream all year long, lol. I guess this explains why DQ is open all year long, but I digress.

With my new idea fresh in my head I began my research into buying a building and becoming a landlord. My project research brought on some serious sticker shock, and reality hit me like a ton of bricks. Entry into the RE world required lots of capital, skill, and time. I had none of these things. I was too busy on the tennis courts developing a good backhand, went to college reading the classics so I couldn’t fix a thing, and of course I had no capital. My dream to be a landlord was quickly squashed. Heck, at least I was smart enough to know I had no business venturing into the black hole of real estate.

So, what does Cathy, my tennis friend with the pony tail and very good backhand, have to do with this? Besides having a good backhand and a love for ice-cream she is really smart. After I discovered my place was not in the world of Real Estate, she so casually and innocently said, “I would love to own a building if someone gave it to me.” That comment has stuck with me since I was 25. It was so dead on. So perfectly profound. I doubt she intended it to be as such but “oh my, my blood was up” (reference from Dial M for Murder, lol). Again, I digress.

That comment made perfect sense. Give me a building minus the mortgage and all I need to do is collect the rents with enough income for tennis and repairs! Plenty of dough to keep my game razor sharp, even in winter! Problem is, my parents didn’t own a building that they could pass on to me. But the concept has stayed with me all these years, and I have even been able to apply Cathy’s comment to stock investing. I see a parallel to RE ownership. Why lock up so much capital in owning stock? Why not use the leverage RE offers, minus a mortgage (I don’t advocate being in margin) and use stock options to invest in the market? Why not lease the market? How can one lease the market you ask? By using leverage via stock options. So instead of spinning my wheels researching what property to buy and fix, why not do my research and pick a stock and control it using options. Of course, I want to own 500 shares of MSFT, APPL, AMZN, etc. and sell covered calls against them for income - who doesn’t? There is one minor detail I have to overcome…MONEY. To buy 500 shares of MSFT today would cost $78,000. I would love to collect the rents from those 500 shares, but I don’t have $78,000. Should I borrow against my house? Should I take out a loan? Should I use margin?

How about using a long-dated option? Buy a one-year Option on MSFT, 5 times, using only $17K. Owning the option still allows the investor to collect the rent. This strategy mimics the covered call. So, while no one is ready to hand over 500 shares of MSFT to me, I have discovered a way to be a landlord with far less capital using the options market: no carpentry skill required and plenty of time.

If you find yourself in need of income to support a tennis habit, look into using the covered call. If that still takes too much capital, look into buying a long-dated option on a stock/company you like and sell calls against the option. It is the same bullish opinion as owning the stock, for a fraction of the capital necessary. Technically speaking, this strategy is called a “diagonal” spread.

“Sure, I want that building, if someone would give it to me.” Great words of wisdom still ringing true today. If you don’t have a rich uncle leaving you a building or a wad of money, look into this strategy. There are even options one can use to hedge, or protect their options from loss. That vehicle is called a Put option. I bring this up because when I started typing this, MSFT was $156/share. Right now, it is $148. Remember, the market isn’t here to make you happy, so always buckle up and use Put options until the coast is clear.

Thanks, Cathy, for your spontaneous words of wisdom. They have helped me see the stock market in a way that allows me to play in the market using options. No way I want to own ANY stock, unless it’s given to me!!