Monday, November 21, 2011

Option Income - 2011 Dividend Machines

Option Income analysis – 2011 Dividend Machines
            Income investors, covered calls, as you know, are contracts that pay you money known as a call premium. These premiums can be as little as ten cents a share or as much as several dollars a share.  So you see covered calls can provide significant investment income.  In retirement, this is very important.

 In exchange for receiving the call premium, you give the buyer the right to buy your stock at the strike price of the contract. The strike price is critical because income
investors do not want to lose a good stock without a gain and we certainly do not want to lose a stock at a loss.  In my previous posts on covered calls, I have emphasized the need to secure at least a ten percent gain if your stock is sold to the call purchaser at the strike price. 

 I always tell income investors to buy companies that pay you income in dividends, even stodgy old companies that qualify as dividend machines, can have enough upside price potential that another investor will purchase from you the right to buy your stock at a predetermined price.  You get to keep the income from the call no matter what.  If the price of the stock has increased beyond the strike price, then the person to whom you sold the call will exercise their right to buy your stock.   If the stock price is less than the strike price, the purchaser of the call has no obligation to buy your stock and you continue to own it. Since you get to keep the stock in this situation, you always want to make sure the stock continues to be an income producer for you.  The third characteristic of a call is the duration of time between selling (also known as writing) the call and the call expiration date.  I like calls that expire no greater than 90 days from when I receive my premium income and the expiration of the call. Now let’s see how this applies to our 2011 dividend machines.

Options for November, 2011 expired this weekend.  I had 19 stocks with calls scheduled to expire this weekend.  Five of those calls were on dividend machines.  I wrote (sold) calls on the other fourteen stocks for various other reasons I will discuss in another post.  Let’s concentrate on calls only from dividend machines. 

Microchip Technology, symbol MCHP; PepsiCo, symbol PEP; Intel, symbol INTC; Chevron, symbol CVX; and AT&T symbol T were the dividend machine calls.  MCHP, INTC were taken (the call option purchaser exercised their right to buy my stock) and PEP, CVX and T calls expired.  I had several non dividend machine calls also taken.  This all means I have cash to invest.  The covered call opportunities on our 2011 dividend machines are discussed below.  I will, and I hope you will, use this discussion to determine how to invest for income.

Not all our dividend machines provide covered call opportunities but at lot of them do.   Based on closing prices and options premiums on Friday, November 18, 2011, I found six calls on five companies that would create immediate income of at least 1%, expire in no more than 90 days, and if taken, would generate more than a 10% capital gain.  If none of these companies is taken before their calls expire, I know every company will continue to pay me at least a 3 % dividend yield that has increased every year for at least the past five years.  These are win/win situations for income investors. 

1.      Chevron, symbol CVX, closed at $97.88 with a dividend yield of 3.2%.  A January call with a strike price of $110 paid a premium of $1.07.  My immediate yield is 1.09%.  If CVX is taken, my gain is $12.12 or 12.38%
2.      Intel, symbol INTC, closed at $24.29 with a dividend yield of 4.1%. A January call with a strike price of $27 paid a premium of $.30.  My immediate yield is 1.235%.  If INTC is taken, my gain is $2.71 or 11.15%
3.      Intel also had a February call with a strike price of $27 that paid a premium of $.44.  On this call, my immediate yield is 1.81%. If INTC is taken, my gain remains 11.15%
4.      Illinois Tool Works, symbol ITW, closed at $44.94 with a dividend yield of 3.3%.  A January $50 call paid a premium of $.67.  My immediate yield is 1.49%.  If ITW is taken my gain is $5.06 or 11.15%
5.      Conoco Phillips, symbol COP, closed at $69.27 with a dividend yield of 4%.  A February $77.50 call paid $1.01 for an immediate yield of 1.45%.  If COP is taken, my gain is $9.24 or 13.33%
6.      Northrop Grumman, symbol NOC closed at $56.75 with a dividend yield of 3.8%.  A January $62.50 call sold for $.60 for an immediate yield of 1.057%.  If NOC is taken, my gain is $5.75 or 10.13%

On Monday, these values will change but you can use these examples to learn how to find even more income from your dividend machines.   These companies are super dividend machines.  I have found the opportunity on companies like CVX and INTC to sell calls two or three times a year.   If none of the calls is taken I have boosted my income as measured as the sum of the dividend and the call premium to 6 percent for more.  When the calls are exercised and they take my stock, my minimal gain is 10 percent each time.  I could make 30 percent on just a single stock.

            Income investors, you should mine your dividend machines for enhanced income opportunities by using covered calls.

Very Truly Yours,
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