Transcription
Hey, it's Soleil, and today we are answering the question: Can you get rich off 100 shares of any stock? And the answer, according to science, is yes. So, let's start with the principle that we'll need to understand before we really get started, and that's how compound interest works.
So, this formula right here will give you how much money you will accumulate after a certain time period and a certain amount of interest. It equals your principal, the amount of money you start with, multiply that times one plus the interest rate. You raise that to a power of the number of times you're going to compound the interest. In this example, I want to start with one percent interest, so that's 1.01. Raise that to the 52nd power. Let's see, we got one percent interest every week for a year. That gives us 1.67 times our original starting amount. So, if our principal was 100 bucks, we'd end up with 167 dollars. For principal a thousand, we'd end up 1,677 dollars. And the stock market generally, people are happy if they get 10% a year, I guess. And this would be 67% for the year, so that would be an insane return.
If the prerequisite for this is that you would, this assumes that you're reinvesting 100% of your profits. So, you get 100% if you earned, uh, one percent on a hundred bucks, then you would be reinvesting that one dollar and then getting one percent on the one dollar. So, the next week, you get an extra penny. You'd make one dollar and one cent. And so, in reality, that's not always possible. But even with just one percent a week, not compounded, that would be one percent 52 times. So, this, this number would be 1.52, which is still a heck of a lot better than the average stock market return.
So, how can you achieve numbers like this? The way to do it is to sell a covered call. If you earn one percent on a covered call, you could then use the premium that you earned to buy one share of that stock. So, this is a, this is a stock that I trade. And let's say we went all the way up here to the nine-dollar strike. We bought 100 shares of MARA at six dollars and fifty-four cents each, the cost of 654 dollars. And these prices are after trading hours, so they might not be exact, they might be skewed a little bit one way or the other, but they're going to be accurate enough for our purposes.
So, you buy 100 shares, you shell out the 654 bucks, and then you go up here and you sell the nine-dollar strike. You probably only get, I'll see, the bid-ask is eight cents, nine cents. You probably, if you want it to fill immediately, you'd have to sell it for eight cents. If you look at this, the share prices, you spent 654. So, one percent of that would be six dollars and fifty cents. So, you really would only have to earn six, seven bucks in order to get one percent this week. So, you sell this nine-dollar strike, you get paid your eight cents, nine cents, you've made one percent profit this week, and you can use that eight dollars now to buy one more share of MARA.
So, now you have 101 shares. And if you do that again next week, and the next week, and the next week, eventually you'll have 200 shares. And at that point, you can sell two of these nine-dollar strikes and you can buy two shares of MARA. And this is assuming that the price of MARA doesn't even change. Um, so really, what I'd like to do is, is trash talk the buy-and-hold strategy for a second. Because if you, if you bought this stock and the price goes up to seven dollars, and then you get excited, yay! And then the price drops down to five dollars, boo! And then the price goes back up to 654. And 10 years from now, the price is still 6.54 cents. You've made nothing. And congratulations, you paid no taxes, no capital gains on no profit. So, great.
However, if you sell the covered call, even if the price remains 6.54 cents forever, it doesn't go up or down, you don't make any money off the share price itself. If you reinvest the profits from selling the covered call, eventually you'll have 200 shares, 300 shares, 400 shares, 500 shares. And eventually, you'll reach critical mass when you accrue 10,000 shares. Because one percent of 10,000 is a hundred. Meaning you can actually, from the interest that you make selling a covered call of 10,000 shares at one percent, you can buy another 100 shares and sell another covered call. So, instead of selling 100 covered calls, you'd be selling 101 covered calls.
How long does that take? Well, I mapped it out on, um, an Excel spreadsheet. Let's say today you started out with 100 shares. It's going to take you 100 weeks buying one share a week to get 200 shares. Next week, you buy another share. I'm sorry, after I, after you get 200 shares, now you can buy two shares a week. Not only is it going to take you 50 weeks to get another 100 shares. Now you got 300. At that point, you can buy three shares a week. Only takes you 34 weeks to get another 100 shares. And so, you can see this starts to speed up. And at some point, you get kind of close, but it takes a while. How long it takes? 573 weeks, which is 11 years. That is if you put no additional money.
So, the prerequisite is that you are going to get rich off 100 shares, meaning you buy the 100 shares and you never put any additional money of your own in. You can use that 100 shares to generate cash, buy more shares from the profits, and eventually, you would own 10,000 shares in 11 years. And that's when you really reach critical mass and you can reinvest 100% of your profits. And you start earning this amount, 1.67 times your, your starting amount, which in this case would be 654 dollars. Um, of course, at some point, I guess I should say that this isn't financial advice. I'm not a financial advisor, so I can't give financial advice. However, this is a strategy that I use, and it's worked for me, so I'm sharing the strategy.
Um, now, one percent is pretty conservative. Uh, something like Apple, you know, maybe it's hard to get one percent. Um, you'd have to sell an at-the-money strike, probably, or maybe a dollar above. With, with Apple. But something like MARA is a, is a cryptocurrency mining stock, so it's pretty volatile. And with that implied volatility, you can get more premium. So, this is, but this is being extremely conservative. Because what you're actually saying when you sell this covered call, and I'm not going to explain everything about options. I, I learned from basically everything that I know about options from the Tastytrade videos and In The Money. So, check out Adam's channel, In The Money, if you, if you want. He's an excellent, um, my teacher in that regard. So, check that out if you want. If there's interest, maybe I'll do some basic tutorials on options. But, um, I guess most of this is assuming you know what most of the stuff means. But I'll, the quick, quick and dirty version is that you sell a nine-dollar strike against your shares. If the price goes above nine dollars, you will be asked to sell 100 shares with the other person for nine dollars. So, even if the price goes up to 10, 12, 15, 20, you have to sell it for nine. So, you are sacrificing your max profit.
Now, why would you want to sacrifice your max profit? Because everybody wants to hit the lottery. They want to pick the next, you know, meme stock or whatever. But most of us suck at picking stocks. And, by selling a covered call against it, you are reducing your cost basis, which increases your chances for success. Everything is a trade-off. And one of the principles that I learned from the Tastytrade folks is that you, the reason why you would limit your profitability, your max profit, would be for an increased chance of success. And if you think about it, if someone asked you, do you think you could do well in the stock market if you bought all of your stocks at a one percent, two percent, three percent discount? Do you think you could do, you know, as well as the market getting stocks cheaper than everyone else? And it seems intuitive to me that the answer would be yes. And that's basically what you're doing.
So, the other version of this is selling a put. But I'm, I'm just going straight to buy a hundred shares and then sell, sell the covered call against it. You're basically, instead of buying for 6.54 cents, you're getting paid that eight, eight, nine dollars. So, you're really only paying six dollars and forty-six cents if you got paid eighty cents. So, every time you do this, you're getting a little bit of a discount. And that, that's the point of it. So, that strategy is what I learned from Tastytrade. But applying the principle of compound interest was, was kind of my idea. That that goes along with that. If you, if you just keep reinvesting the profits, you would be able to multiply, uh, your starting amount by a figure way more than, than what just buy-and-hold strategy will get you. And like I said, one percent is pretty conservative. But let's say you're able to get something insane like five percent. If you get five percent and you can buy five shares a week, not only takes you 20 weeks to get 100 shares and now you have 200. Doing the same principle, then you can buy 10 shares a week. Takes you only 10 weeks to get to 300. In this scenario, it only takes you 80 weeks to reach critical mass with a much smaller number, about 2,000 shares. And at that point, you would be able to buy an extra 100 shares every week with the premium that you made selling a five percent return covered call on, uh, 2,000 shares. So, you'd be doing 20 contracts, again, five percent each. That'll get you another 100 shares, and you can still want more covered calls. So, 80 weeks is about a year and a half. So, if you're a little bit greedier with the premium, you could accelerate this.
But every time you choose a lower strike, that's called the call-away value. So, if the price goes above eight and a half, you know, you'll profit from the 650 to eight and a half, but you would not profit if it goes to 10 or 12. And which brings me up to another point. The reason why I like covered calls is it's one of the only plays that you can make that benefits, that that can benefit both sides. So, I, I think of it as the most ethical contract, really, in the stock market. And the way this works is, if you bought shares for 6.50, you sell this 8.50 strike, and the price goes to ten dollars, for example. You're going to profit all the way from 650 to 850. So, you're going to get two dollars a share. You made two hundred dollars, plus the 10, 12 bucks you made selling the strike. Uh, so I'm gonna call it the 8.5 strike. So, you've made 212 dollars. If the price goes up to ten dollars, the other person that bought your eight, eight and a half call, he paid you the 12 bucks, but he gets to profit from the 850 to 10, which is 150 bucks minus the 12 he paid. So, he makes 138 dollars. You made 200 something bucks. Both sides are actually profiting and happy in this trade. So, anybody who says, "Oh, I don't want to limit my profitability. I'm only going to make, uh, two hundred dollars on a six hundred dollar investment." That's like thirty percent a week. Uh, I, I don't feel sorry for you.
Now, the other criticism that people will have is that you may, you don't have to pay taxes on the profits, capital gains, whatever. And your taxes are your business. Not a tax advisor either. However, I would say that most people don't turn down a raise from their boss just because they're going to have to pay more taxes. So, if paying more taxes is your excuse for not making more money, then that's your business. But I would prefer to make more money, even if it means I got to pay some of that at the end of the year.
All right, so let's just take a look at a couple of these strikes. You can see this little minus one, minus one. I've actually got two covered calls, that's seven and seven point five. So, you can see that I'm a little greedier than, uh, than most. I'm perfectly fine with the price going from 650 to seven. Let's see, one percent of 667 bucks, the amount of premium that you can get at the seven-dollar strike. Seven times five is thirty-five. So, you can get about five percent interest this week at the seven-dollar strike. You only wanna, if you want to be a little less greedy and potentially get more call-away value and go to the 7.5, you could get three percent this week. Uh, what is that? Two, two and a half percent at the eight-dollar strike. One and a half percent, almost two percent. And one percent of the nine-dollar strike.
Now, the biggest threat to this strategy is the same threat that buy-and-hold people suffer from, and that's if the price goes way down. So, if the price actually goes the other way. But if the price of MARA went like, in half, or down to three, four bucks. So, now would be, it would be hard-pressed to get one percent off your original starting amount. You can get one or two percent, five percent off the new amount. But if you had to sell a covered call, you bought it for 650, enough to sell a covered call for five dollars in order to get that one, two, three percent. That puts you at risk for having to sell the stock for less than you paid. And that kind of goes against the principle of buy low, sell high. However, I, you know, that's the risk of buying stock. So, if you can never handle the risk of the stock price going down, then probably just have to stay out of stock market investing to begin with. Um, it's called, at that point, it's kind of, kind of called, it's called bag holding because you get stuck holding the bag. And it makes it difficult to sell covered calls. However, there's an, uh, you can actually extend the duration. So, if we wanted to go out here, generally 45 days, according to Tastytrade's research, is the sweet spot for a longer duration covered calls. So, you could go out here to the 40 or the 55. Let's just do the 40 day. And so, of course, this doesn't want to load. Okay, anyway, that's, so if we had bought the stock for 10 bucks and it dropped all the way to its current price of 654. You could still sell a covered call at your original strike price, or, you know, way up here if you wanted, and still get paid a good amount of premium. And then about once a month or so, you would roll this call out to the, to the next closest 45-day expiration date. So, every three to four weeks, you would just, you know, this is just going to keep shrinking. So, you sell it for 60 cents, maybe you buy it back for 30. And then you do that once a month, you're making 30 cents, seven, eight cents a week. So, it kind of works out to about the same. And then if the price goes back up to 11 at your expiration date, then you can, you can either try to roll it out again, or just sell it off like a new stock.
Let's see what else. The other thing that I like about this too, is, um, since most people are so bad at picking stocks, figuring out when to buy low, you'll buy low and then it goes lower, then you freak out. And when the, it goes up, you sell. And then you sell too low because it goes up another 20 bucks. Um, but this is kind of like agreeing to sell high every week. So, you're, you're buying it for 650 and you're saying, okay, well, if the price goes up to 750, I'm happy with that profit. And it's kind of like an easy mode way of ensuring that you sell high. That's one way that I like to think about that. Um, I'm just checking my notes here. Yep, that's, that's, that's it in a nutshell. Most everything that I wanted to cover.
If you, um, I mean, the way that I like to do it actually is, if you, if you have a more expensive stock, you can, um, you can sell premium. And if that premium is at least 654 dollars, then you can buy 100 shares of MARA and, uh, sell another covered call against that. So, even if you don't have 10,000 shares of something, if the amount of premium that you're selling from your other holdings is at least 100 shares of whatever it is that you want to buy, then you can still work it that way. And you're basically reinvesting 100% of your profits every week. And you can still cash in on the principle of compound interest that I'm using here. The, um, if you do go, that is why I get a little greedy with the premium sometimes. If you do get something ridiculous like a five percent interest, and you get that 52 weeks, that's going to be 12 extra money in a year. So, you can absolutely profit with this strategy. Again, the main danger is the same danger that the buy-and-hold folks suffer from, and that is if the bottom drops out of the whole thing, or the stock that you bought goes bankrupt. So, you don't have to be the best stock picker in the world, but as long as you don't pick a stock that goes bankrupt, uh, this, this can work for you.
All right, maybe I will do some real-time videos while the market is actually open in the future, so people can see this in real time if they, if they would like to. So, stay tuned for that and be good, y'all.