Last week I introduced the subject of generating cash from your stock portfolio. Not only is that a worthy goal, but I've read that dividend paying stocks outperform the market by 1% to 1.5% per month during downturns. This sounds reasonable to me. Why would someone sell their dividend paying stocks if they could make 20% to 30% a year even in a bear market?

Let's see how this might be done. First of all, we need to find an acceptable dividend paying stock. We can do this by simply accessing Stock Viewer and sorting by YSG Desc. As of yesterday, Thursday, 09/04/08, Cal-Maine Food, CALM, was in the top spot. Although it now has an "S" rating and I wouldn't buy it at this time, I want to keep my eye on it because it's making a ton of money and has an excellent Dividend Safety, DS, rating of 87. So let's use it as an example.

CALM closed yesterday at $34.50 per share and is paying cash dividends at the rate of $2.06 for a yield of 5.97%. If I were to buy these shares on margin, the effective DY would be twice as high, i.e., 11.94%. Of course I would have to pay interest to my broker on the borrowed funds, but the interest expense is tax deductable. Although I'm already looking at a juicy return, how could I get more? I'd sell some out-of-the-money Covered Calls. Yahoo!Finance shows that CALM had its last ex-dividend date on July 28, 2008, so I'd assume that its next declaration will be made in late October. Therefore, I'd be selling the November 40 Covered Calls, which are currently trading at $1.75 per share.

Here's how this trade would work: I would buy 100 shares of CALM on margin for about $1,725.00, not counting commissions or interest and I would sell one CALM November 40 Call Option @ $1.75 per share. My account would be charged $1,725.00 for buying the stock and be credited $175.00 for selling the option. The net charge would $1,550.00 not counting commissions or interest. Around the middle of November, my account would receive a dividend credit of about $51.50. The total income from the sale of the Call Option and receipt of the dividend payment would be about $226.50. This would give me a quarterly return of 13.1%. If I could do this four times a year, my annualized rate of return would be 52.5%, not counting commissions and interest.

This sounds great, but there are several other things that can happen to this trade. For example, the stock's price could rise prior to the ex-dividend date and the stock could be called at $40.00 per share. Although I wouldn't get the $51.50 dividend payment, I'd make about $500 on the stock and get to keep the $175 option credit too. This is not a bad deal.

If, on the other hand, the stock's price fell, I'd have to make some decisions. I could hang on to the stock, collect the dividend and option premium, and repeat the process again the next quarter. But that's no fun. I usually buy back the Call Option at a much lower price than I sold it for; then get more income by selling another Call Option at a lower Strike Price. This technique invokes the risk of getting called out of your stock at a price lower than your purchase price, so I suggest that you practice it with only small amounts of money before using it with serious money.

Incidentally, did you know that most of the market's historical gains have come from dividends? Maybe you've heard that selling covered Calls was the most frequently used option trade. Both generate income. Put them together and you have the Cash Machine, Part II.

P.S. Terra Nitrogen, TNH, closed up $8.51 today and is up over $14.00 since I mentioned it last week.

I met a lot of people at the recent Money Show in San Francisco who own stocks that are way down from their recent highs. Unfortunately, they did not take profits or protect their positions when the market rotated on the sharp 23% drop in crude oil prices. What could they have done to avoid this problem?

First of all, you can't fall in love with a stock and you can't worry about paying taxes on your gains. This means that you should always have an exit price in mind. VectorVest helps you in this regard with its Stop Prices. You can use them either as gospel or as a guide, but don't ignore them. Yes, I've heard every complaint imaginable about our Stop-Prices, stuff like they're too high, too low, too fast, too slow, so I challenge anyone to come up with a better one. See my essay of January 17, 2003.

If you were reluctant to sell a great stock, such as Potash Corp., POT, when it got an 'S' rating a month ago, what else could you have done to protect your profits? The answer lies in our Strategy of the Week, "Protecting Profits," which was first presented on March 31, 2000. It was presented again and again on the following dates: 06/08/01, 12/28/01, 02/27/04, 07/14/06, and 07/20/07. The 07/20/07 presentation is on the VectorVest University.

It's interesting to note that four of the eight techniques given in the Protecting Profits strategy involves the use of options. Remarkably, most of the people I talked to at the Money Show did not know how to trade options. That's too bad because they could have saved a lot of money with some simple option trades. Yes, the option trades I'm talking about are simple, but they aren't necessarily easy to understand. So you really need to know what you're doing when you trade options.

I learned how to trade options by reading, reading and reading. I must have read 30 books, all of them very boring, before I felt like I really knew what I was doing. And I took some very expensive courses, also very boring, before I felt comfortable making large options trades. After several years of trading, I felt that I had the knowledge and experience to write an options course that was as good as or better than any other course you'll find anywhere. The key to the VectorVest Options Course is that it takes nothing for granted. It starts with the basic definitions of stock options, the two types of options, Calls and Puts, and teaches over thirty option strategies from simple to complex, step-by-step. It's perfect for investors who want to learn how to trade options from the ground up.

Once you learn to trade stock options, you'll know how to keep the stocks you love and not lose money even if they go down. It's like having your cake and eating it too. When a good stock goes south, use options to Ease the Pain.

It may have been a coincidence, but two weeks ago I wrote an essay called, "Making a Quick Killing," and last week I wrote about two VectorVest users, Mr. David Price and Dr. Sarosh Quereshy, who did very well, indeed, in the recent CNBC Million Dollar Portfolio Challenge. Both gentlemen got off to a good start; then made huge profits during the last week of trading. That was no coincidence.

Actually, both gentlemen were in sync with VectorVest's guidance, and both managed their portfolios in a similar fashion. They started out very well by using the "Stalwarts" strategy, faltered a bit; then made huge killings when the market exploded off of the July 15th bottom. David made $1,000,000 in the last two days of trading and Sarosh gained 38% in the last week. They did exactly what I hope you will do: they learned how to use our guidance and act on their own. What do I mean by that?

I firmly believe that market direction is the single most important thing you need to know in order to consistently make money in the stock market. You must let the trend be your friend. So we work very diligently on indentifying the market's trend. We want you to buy long in an up market and go into cash and/or sell short in a down market. Therefore, market direction is the headline story on our Home Page. The Market Barometer and the Color Guard at the top of the home page give immediate, visual representations of what the market is doing. Read them like you would a traffic light. Green is go, (up), yellow is caution, (transition), and red is stop, (down). That's the easy part.

The hard part comes in knowing what to do with this information. Since different investors respond differently to the same information, we provide guidance to three types of investors: Prudent, Aggressive/Traders and those who are "Riding-the-Wave." Implicit in this guidance is the belief that the market will follow a path suggested by our indicators. For example, if we have three red lights and a DnDn situation like we had after yesterday's close, our guidance will be to play the market to the downside. This is all well and good, but you cannot commit your trades until you see what the market is actually doing at the time you trade. YOU MUST GO WITH THE FLOW.

Last night we said we "will go short tomorrow with one of the following strategies if the market moves to the downside." Well, the futures were pointing up this morning and the DJIA is up about 200 points as I write this essay. Consequently, we haven't gone short yet today and it doesn't look like we will. This should not surprise you. Please read my essays of 12/23/05 and 11/24/06. They explain in detail how we manage the Model Portfolio. Memorize what these essays say, and you will be on your way to doing what Dave and Sarosh did: use our guidance, act on your own and Become One of the Best.

Congratulations to Mr. David Price of Columbus, Ohio for achieving the 2nd Prize Award of $100,000 in CNBC's Million Dollar Portfolio Challenge. Fantastic! How did he beat all but two other guys in a contest of over 254,000 contestants?

Of course, he used VectorVest. According to David, VectorVest was the catalyst that sent him to the top ranks of the contest. He implemented the Stalwarts strategy, buying the top four stocks when the contest began on May 12, 2008. He said that Stalwarts kept his portfolio moving up and moving down, but staying in the top 25 ranking. Then when the market started moving down, he sold out of his Stalwarts picks and just selected stocks "hit and miss." This approach sent him down to 31st place in the overall contest.

Then, he said that when I wrote about the consolidation pattern on Friday, July 11, 2008, that was enough for him. He spent a good deal of time testing the five strategies that I recommended to go long with on the 16th and said that he liked Odd Fellows Long and Pirates Long. He then selected Pirates Long because the stocks it returned were mostly financial stocks, which everyone knew had been beaten down the worst. So he bought Freddie Mac, Fannie Mae, Wachovia and Regions Financial on the 17th and by the end of trading on the 18th when the contest ended, his portfolio had climbed from $1.8 million to $2.8 million, leaving him in third place and winning $100,000.

Wow! What a story. We're very happy for you David, and we're extremely proud that VectorVest helped you become a $100,000 Winner.

A GREAT TRY.
On June 12, 2008, Dr. Sarosh Quereshy was in 1st place in the CNBC contest and said it was because of VectorVest. He too was using Stalwarts and he did very well until the big correction occurred the week before the end of the contest. He fought back from 116th place to 10th place using bank and financial stocks as the contest end was nearing. His portfolio was up 38% in the last week of the contest, but he still didn't win! Ouch.

Dr. Quereshy says that if that had been his IRA, he would be retired now. Nevertheless, it must have been a great thrill to come so close to winning. Our compliments go out to Dr. Quereshy on A Great Try.

STOCKS YOU SHOULD KNOW ABOUT.
Many of you have noticed that we have put a new feature on the Home Page of our website called "Stocks You Should Know About." This feature highlights "Best Performers > $1.00" when the Dow Jones Industrial Average is going up and "Worst Performers > $10.00" when the Dow Jones Industrial Average is going down. You have also asked for the strategies we use to find these stocks. Here they are:

Best Performers > $1.00: Price (Split Adjusted) > $1.00, AvgVol > 100000, %PRC > 2, REC = B, RV > 0.90, RS > 0.90, Sorted by RT*CI Desc.

Worst Performers > $10.00: Price (Split Adjusted) > $10.00, AvgVol > 100000, %PRC < -2, REC = S, RV < 0.90, RS < 0.90, Sorted by RT*CI Asc.

These strategies will be placed into the UniSearch Tool this evening. As far as the website goes, these strategies are being run on VectorVest RealTime every 60 seconds, but with a 15 minute delayed signal. If you actually have VectorVest RealTime, you can run them on a refresh cycle time of your choice with actual, real-time pricing. If you don't have VectorVest RealTime; then visit www.vectorvest.com to watch a fascinating display of Stocks You Should Know About.