Quick, what is one of the most positive cash flow businesses with high revenue margins? If you guessed insurance, give yourself a pat on the back.

Through its subsidiaries, Lincoln National (NYSE: LNC) offers a variety of insurance products and retirements services, such as annuities, life insurance, group insurance, wealth protection and retirement income products. LNC offers those products through consultants, planners, brokers, agents, financial advisors and other third parties.

In the past year, shares are up roughly 40%.

On Feb. 3, as the Dow Jones Industrial Average plunged 326 points on emerging-market worries, LNC fell nearly 5%, closing at $45.78. As you can see in the chart, the former resistance line acted as support.

Two days later, the company reported better-than-expected fourth-quarter operating earnings of $1.40 a share, compared with estimates of just $1.10, and shares bounced on the news. They continued to climb, hitting a multi-year high of $53.26.

Since that peak, LNC is off more than 13% and testing support at its 200-day moving average. Traders can capitalize on this pullback and even get in another 4% lower with today’s trade.

On the fundamental side, the trailing price-to-earnings (P/E) ratio is around 10 based on diluted earnings per share (EPS) of $4.52. Analysts expect the company to earn $5.88 per share next year, giving the stock a forward price-to-earnings (P/E) ratio of less than 8. That is less than half of the industry average of 17.

Earnings have grown at an average of 13% a year for the past five years, and analysts expect them to grow at an average of 10.2% a year for the next five years. The PEG ratio compares a stock’s P/E ratio with its earnings growth rate, with a reading of 1 being considered fair value. LNC has a PEG ratio of 0.78, signaling that shares are undervalued.

LNC pays a small annual dividend of $0.64 per share, for a current yield of 1.4%. The company has a payout ratio of just 11%. This leaves plenty of cash for expansion and growth and to sustain a downturn, but it’s not very attractive to income traders. But we can turbocharge this income with a covered call strategy.

A call option gives the buyer the right but not the obligation to buy shares of the underlying stock at an agreed-upon price (the option’s strike price) within a certain period of time.

The seller of a call option (also known as the writer) sells the right to the buyer for a payment known as a premium. In doing so, the seller assumes the obligation to deliver the shares at the agreed-upon price should the buyer choose to exercise her or his right.

With LNC trading at about $45.66 per share at the time of this writing, we can buy 100 shares and simultaneously sell a May call option with a $45 strike price, which is currently trading for about $2.20 ($220 per contract) and expires on May 16.

Since we receive $2.20 for selling the call, our net cost is lowered to $43.46 per share. Prices may be slightly different depending on when you read this, but I like this trade at a net cost of $43.70 or less, which is below the 200-day moving average.

Here’s how this covered call trade could work out:

If the shares trade above the $45 strike price, the options buyer will purchase the shares from us at $45, giving us a gain of at least $1.30 per share, or 3% in 32 days. This works out to a 34% per-year rate of return.

If LNC trades lower, we would not experience a loss unless it falls below our net cost of $43.70 or lower, giving us a cushion of about 4% at current levels.

If LNC is below $45 at expiration, then the call option will expire worthless. We then have the ability to sell another call option against the shares to generate more income and lower our cost basis further, while still collecting dividends.

Action to Take –> If you were able to generate $2.20 in income every 32 days on this stock, that would add up to about $25.09 a year. Add in the actual $0.64 dividend, and you now have a “yield” of 56% at current prices — that’s 40 times more than your average dividend investor.

This article was originally published at ProfitableTrading.com:
How to Earn 40 Times More Income Than the Average Dividend Investor

P.S. By using a similar options strategy, my colleague Amber Hestla is generating payments of $1,047, $2,435, $3,410, and sometimes more from nearly any stock — including ones you may already own. This free report explains everything, including names and tickers.