Monday, August 12, 2019

A case for Selling Calls for the Income Investor

Call income seems to accompany dividends as the best income tools for August.  Bond interest is so low and quality dividend stocks are so expensive.  Therefore, I sell covered calls on existing positions hoping I do not lose too much opportunity by having my stocks called away.

August is a pretty typical month for call expirations.  History tells us 90 percent of calls expire without action and 10 percent are assigned.   In the table below, I have 18 calls with August expiration dates.

As of today, I have 4 in the money which means the current stock price is above the strike price and 14 out of the money where the current stock price is below the strike price of the call. See the table below.



Only one of these stocks does not pay a dividend and that is YELP.  When I realized YELP was not going to perform quickly, I sold a call very close to the current price and my basis and am hoping it is called away which means the call buyer not only paid me a premium for the option but will also pay me the strike price.  That makes me even on the stock and the call premium in my pocket.

Three other stocks have low dividend yields, MSFT, NVDA and SWKS.  I consider a yield low if it is below the 2 year U.S. Treasury yield so SWKS with a yield of 1.99% may not be considered a low yield stock for some.

I like MSFT but with such a low dividend, as an income investor, I am willing to lose part of my position to the call buyer.  I am underwater on NVDA and will hope the China situation improves at some point.  I will continue to sell calls that are close to my basis so that I can unload NVDA in a similar fashion to YELP.

FOUR IN THE MONEY CALLS

The four income money calls are:   MSFT $135, WDC (Western Digital Corp.) $52.50, CVS $57.50, and YELP $34.   Expiration dates are August 16, 2019 except where noted.  My reasons for risking losing these stocks to the call buyer are:

  • MSFT - yield is too low
  • WDC - yield is good but not growing, EPS are less then dividend paid out but growing
  • CVS - (August 23 expiration)stock price is weak, I added to my shares that are underwater, and sold calls against the low buys
  • YELP - no dividend and stock price is not performing as hoped 

The downside of selling covered calls is two fold. one is lost opportunity.  The call buyer was right to pay you the money for the option to buy, they execute the call and then the stock soars and you miss out on the growth.    If you always look back and are cannot afford to lose a favorite stock, don't sell calls against your beloved stock.

The second risk is your shares are on call, the stock price tanks, you would like to get rid of the stock but cannot unless you pay money to buy back the call.   This risk is untenable for an income investor.  We don't pay out, we deposit funds.  The moral is to pick the underlying stock carefully.

FOURTEEN CALLS OUT OF THE MONEY

The 14 out of the money calls are listed below.  Each stock pays a decent dividend and I am willing to keep them.  I am hoping for additional volatility that may allow additional call selling.  But I am not in such a hurry to lose these stocks so I pick strike prices that I think are harder for the stock to attain before the call expires.  Expiration dates are 8/16/2019 except where noted.

  • MSFT - $145 low yield but upside potential for this very well run company 52 week high $141.68
  • COP - $67.50 nice dividend increases of 7+% recently  
  • LVS - $62, $65, $67.50 High yield with enough volatility that strike prices well above my basis are available.
  • M - $23 High yield with an improving balance sheet and very low P/E (price earnings ratio)
  • WSO - $180 Nice yield, with good fundamentals, headline risk due to global exposure provides strike prices well above my basis
  • SWKS - $82.50, $85 Decent yield, good balance sheet, nice volatility, I have been able to sell calls two - three times per year
  • WMT- $115 Walmart does not raise the dividend much and the yield is mediocre, strike prices near the 52 week high of $115.42 pay enough premium to make WMT a hold.
  • WDC - $55 High yield and improving fundamentals
  • SWKS- $81 (August 23 expiration) Decent yield but enough volatility to enjoy call premiums more than once a year
  • RDS.A - $63.50 (August 23 expiration) Very Good Yield, calls available only about once a year and I sell calls on only part of my position always above my basis and hopefully pick a strike price high enough that I am not called away.
  • NVDA- $185 (August 30 expiration) my worst performing stock of the group.  Not enough dividend to care if it is called away.   
In my case 22.22% of the calls are likely to be exercised versus the historical average of 10% but we still have to see what happens the rest of August.  This post illustrates how conservative income investors can use call options to boost their income during a time when quality dividend stocks are expensive and quality bonds are outrageously expensive.

M* MoneyMadam



Thursday, August 8, 2019

Novocure NVCR

This stock idea is totally out of range for TheMoneyMadam except for one metric and that is call option potential; that potential allows you to generate income on a non dividend stock.   If you believe in your pick you can concentrate on reaping gains from a growth stock while you work the calls.

This stock is in my portfolio because Alfred Ferol alerted me to the science behind their products.  It is my own analysis of the stock’s potential for growth and income that makes me agree that this stock is worth the risk for me.

Let’s begin with the underlying stock and then I will present several call options that make sense to me.

NOVOCURE, symbol NVCR


Novocure is actually a medical device company operating as a bio technology stock.  The company describes it this way.



treating cancer
with electric fields

Tumor Treating Fields uses alternating electric fields specifically tuned to target cancer cells. Once the electric fields enter the cancer cell, they attract and repel charged proteins during cancer cell division.



By using physics to influence biology, Novocure discovered another way to treat cancer.  Their mechanism of action is broadly applicable across a variety of solid tumors.  As you read through their clinical studies, you can see their therapy is used in conjunction with chemotherapy to extend survival.

REVENUE GROWTH Catalyst

Large market growth catalyst from improving life expectancy when used in common with chemotherapy is real.  Optune is the brand name of their tumor treating fields device for glioblastoma.  Use of tumor treating fields with Optune for Glioblastoma and mesothelioma is  FDA approved.  

Sales of FDA approved products are growing.  And, Medicare will start paying for the treatment effective September 1, 2019.  That alone should be a catalyst for growth.

FUTURE Growth Opportunities

From Novocure’s website:


The science of Tumor Treating Fields extends beyond glioblastoma. Novocure has ongoing or completed clinical trials investigating Tumor Treating Fields in mesothelioma, brain metastases, non-small cell lung cancer, pancreatic cancer, ovarian cancer and liver cancer.
2018 New Diagnoses that Novocure may be able to help treat.


























If this treatment is successful, it is truly a gift for these patients. 
Novocure Fundamentals 

Novocure, like many biotech companies is in the developmental stage and that requires money.   Novocure raised money through their public offering and they have used debt.    

Novocure, unlike many biotech companies has a product approved by the FDA (Federal Drug Administration) and is approved by Medicare.  That means they have revenues.   

Novocure continues to burn cash but is improving cash flow.  With Medicare payment approval cash flow should increase.  The table below clearly presents revenue growth over the past 2 and 1/2 years.  This is without the benefit of Medicare payment approval.

  Revenue / EPS Summary *  
 
 Fiscal Quarter 2019
(Fiscal Year)
2018
(Fiscal Year)
2017
(Fiscal Year)
March      
   Revenue $73,309(t) $52,125(t) $34,880(t)
   EPS -0.13 (3/31/2019) -0.23 (3/31/2018) -0.21 (3/31/2017)
   Dividends N/A N/A N/A
June      
   Revenue $86,713(t) $61,514(t) $38,376(t)
   EPS -0.01 (6/30/2019) -0.17 (6/30/2018) -0.24 (6/30/2017)
   Dividends N/A N/A N/A
September      
   Revenue   $64,756(t) $50,109(t)
   EPS   -0.12 (9/30/2018) -0.12 (9/30/2017)
   Dividends   N/A N/A
December  (FYE)      
   Revenue   $69,674(t) $53,661(t)
   EPS   -0.17 (12/31/2018) -0.13 (12/31/2017)
   Dividends   N/A N/A
Totals      
   Revenue $160,022(t) $248,069(t) $177,026(t)
   EPS -0.14 -0.69 -0.7
   Dividends N/A N/A N/A
   Previous 3 Years
 
 
©2019, EDGAR®Online, a division of Donnelley Financial Solutions. EDGAR® is a federally registered trademark of the U.S. Securities and Exchange Commission. EDGAR Online is not affiliated with or approved by the U.S. Securities and Exchange Commission.


Novocure is a developing biotechnology company and medical device manufacturer that has revenues but is burning cash as it continues the clinical trials to measure the effectiveness of their science in more cancers. 
This table presents Novocure's current fundamentals.



NVCR raised capital when they went public and have financed operations with debt.  If I have one concern it is the high D/E (debt to equity ratio.)  Even with established companies, I like to see D/E ratios of 1 or under.   Some argue that debt is cheap and there is some validity to that.  
I am forgiving that concern as I roll through the options calendar and take advantage of calls to create income.  See below

INCOME Potential through call options. 

I bought NVCR on Tuesday during the overall market swoon at $81.05.  Wednesday while NVCR was rebounding in sympathy with the overall market, I sold a September 20, $90 for $2.75.  That call options is presented first.  Today NVCR has even better calls and the second call option shows a call available today. 

August 7, 2019 Call
























August 8, 2019 Call
If you bought today here is what a $95.00 call would look like.





















But consider a more patient trade.  Buy last Tuesday at $81.05 and sell the $95 today and look at the gain.
























Over time, we have worked this stock.  You can see below a list of buys, sells, and calls.  Out of 3,400 shares we have 1,100 left.   So far we have invested around $134,000 and the value of that investment is about $187,000 of which about $92,000 is in the bank.   Call premiums represent a 3.58% yield.  



In summary, we have a company that has created a technology that helps patients on chemotherapy live longer.  They have growing revenues. It appears Novocure has been discovered by the investing community.    


M* MoneyMadam
Disclosure:  Long NVCR with calls


Wednesday, August 7, 2019

Telecom Ideas for yield in a down market

Listed below are four telecom companies to consider.   In this table you can see



China Mobile, symbol CHL, has no debt.  Verizon has the most debt.  BCE has highest P/E (price earnings ratio) and CHL jas the best revenue growth.   All have positive cash flow that exceeds dividends paid out.

All good considerations during this down market.


M* MoneyMadam

Long T, VZ, BCE adding CHT

Crazy Market

Some are suggesting KO and PG  (Coca Cola and Proctor and Gamble) are resilient.   I will not add KO due to the debt level where as PG has some interest.

Dividend Machine Fundamentals are in the table below.



I use these metrics to start my search.   Be in no hurry and pick your income stocks well.

M* MoneyMadam
Long PG

Tuesday, August 6, 2019

LEG for yield

I still like LEG.

https://seekingalpha.com/news/3487621-leggett-and-platt-declares-0_40-dividend#email_link

M* MoneyMadam

Wednesday, July 31, 2019

MDU a 2012 Dividend Machine

Good news on this 2012 Dividend Machine.


https://seekingalpha.com/news/3484327-mdu-resources-plus-2-percent-post-q2-results-raised-fy19-guidance#email_link

M* MoneyMadam

Tuesday, July 23, 2019

Nvidia chips for income

The chip sector is incredibly lucrative for selling covered calls.  You don't get paid much to wait with this chip stock, Nvidia symbol NVDA, less than a 1% dividend yield, but the calls allow you to roll them frequently.  Sell calls with short expirations is how I roll the calls on growth or low dividend yielding stocks.  I am an income investor.

NVDA $187.50 August 30 Covered Call


In this call, I bought NVDA today at $175.66 and immediately sold a $187.50 call that expires on 8/30/2019.

If I am assigned on the expiration date, I should still get the dividend.  But the dividend is barely important.

The call premium alone yields 2.33% nearly as much as INTC 2.45% and if I am assigned, I realize a 9.17% total return on these shares in 6 weeks.






M* MoneyMadam

Disclosure:  Long NVDA

Monday, July 22, 2019

Broadcom Opportunity for income

I sure wish I owned a lot more Broadcom symbol AVGO.  While the stock price volatility can make you a bit squeamish, the dividend income and call option potential make this a stock to own in your income investing portfolio.   Want to retire with income that grows, then consider AVGO.

The knock on AVGO is the price earnings ratio which is in the high 30's.   My readers may find it odd that I own a stock with such a high P/E ratio but I am not so old that I do not need some growth in our portfolio.  When I can buy growth with a good dividend and call option potential, the fear that comes with volatility is easier to handle.  I get paid to wait.

AVGO Covered Call sold today


























The ex-dividend date has not yet been announced and the date could fall after the call expires.  Using their previous history of the ex-dividend date in Septembers, we anticipate the ex-dividend date to be September 18, 2019 (source dividend max.)


Another way to look at this call is if you initiated a position today.

























AVGO Dividend Machine Fundamentals

AVGO is a dividend machine as far as yield and dividend growth.  You will notice an increase in D/E (debt to equity ratio.)  This increase would be troublesome to me if it was used only to inflate price with stock buy backs.  I interpret the increase in debt as using cheap money to fund future growth and to fund future dividend increases.

For those who prefer free cash flow to determine safety of the dividend, you can find comfort in looking at the fundamental details in the table below.


Dividend increases are very important to investors who want to retire on income that grows.  Here is a chart of AVGO's dividend increases over time.








AVGO Volatility



For the ordinary investor, AVGO is a bit expensive.  Today it trades around $297.  You have to own at least 100 shares to sell one contract.  If you want to sell calls on only part of your position to mitigate the lost opportunity if your shares are called away by the call buyer, you need over $60,000 to invest to buy at least 200 shares.

I will not add here.  However, I will add should AVGO's stock price retreats to the $250 range.

AVGO one year price range



Another idea for income investors who want to retire with income that grows.  You get paid to wait through volatility with the dividend and you have opportunities for both growth and additional income.

M* MoneyMadam

Disclosure:  Long AVGO with calls




Thursday, July 18, 2019

Bag Count - An interview with Alfred Ferol


Alfred Ferol called me, he said this is the first time in a long time nothing is going on.   What do you mean Alfred?   Well, have I heard anything from The Money Madam?  Why not? 

You are right Alfred; I am starving for ideas and have not written much lately.  I have only four call expirations this Friday.  Who can live on only four call expirations? 

Well Madam I see many cross currents in buying and selling today.  Buying and selling stocks of course, buying and selling 737 Max, buying and selling dresses and pants, buying and selling options. 

Cross currents?  The other day I saw high bag counts and indeed that is supported by the data.  (Bag counts are the number of packages shoppers carry after buying.)  Consumers are spending money.  Everywhere we go, there are construction projects.  Interest rates are consumer friendly and so is inflation. 

Is there anything negative?  Negatives?   Politics; the people we pay after we elect them are a big negative. Savings income from low interest rates is a big negative.  The unknown, unknowns are always of concern. 

Positives such as the high bag count are critical.  The most significant part of American business is a high bag count.  I would weight bag count as having a 66.5% level of significance because the consumer is 66.5% of the economy.   Everywhere we go there is a high bag count because for the last 10 years consumers didn’t have jobs.  They didn’t spend money.  Now they have jobs.  Now incomes on the entire spectrum of jobs are increasing and this leads to spending.  Is there anything Americans love to do more than to spend money? 

Will the bag count continue?  Data again are on our side.  Consumers are both spending and saving more. So, what do you suggest?  Follow unemployment trends, follow consumer trends, these are opportunities.  Of course, follow The MoneyMadam.  When these data points change, you will adjust. 

Thanks Alfred, I always enjoy your input.

M* MoneyMadam

Friday, July 12, 2019

Another CAT call

I like Caterpillar's volatility.  I just buy CAT, cash the dividend check, wait for some headline news, sell ad call, have CAT assigned and then start over.   At some point this may stop because CAT either goes up too high and I don't have the chance to add on dips, or CAT goes out of business.  I don't think going out of business will happened.  And while we wait for the global growth needed to spur growth at CAT, I will use this yellow machine as a piggy bank.



M* MoneyMadam

Tuesday, July 9, 2019

LVS Las Vegas Sands

While I am out of the office on vacation, I am still making some money.  Calls for dollars.  Here is a trade I made today.   Added a little LVS and sold this call.

         
  7/9/2019 Price on Open Call Expiration   
  LVS $63.00 9/20/2019  
  Cost Basis:   Price on Option Contract Open $63.00  
  Strike Price:   $70.00  
  Call Premium:    $0.85  
  Dividend  Exp ex-div 9/18/2019 $0.770  
       
  Call Yield on Basis   1.35%  
  Call + Dividend Yield on Basis   2.57%  
  $ Gain if Assigned   $8.62  
  Max Return  if Assigned   13.68%  
         




M* MoneyMadam

Disclosure:  Long LVS with calls

BAC Bank of America Call

While I am on vacation, I still do a little money making and will post interesting trades.  Here is one I made today.

         
  7/9/2019   Call Expiration   
  BAC $29.39 9/20/2019  
  Cost Basis:   1/15/2019 $26.57  
  Strike Price:   $31.00  
  Call Premium:    $0.48  
  Dividend  Exp ex-div 9/6/2019 $0.150  
       
  Call Yield on Basis   1.81%  
  Call + Dividend Yield on Basis   2.37%  
  $ Gain if Assigned   $5.06  
  Max Return  if Assigned   19.04%  
         



M* MoneyMadam

Disclosure Long BAC with calls

Tuesday, July 2, 2019

Second Quarter Portfolio Updates

I have updated all portfolios effective 7/2/2019.

http://www.themoneymadam.com/p/blog-page_11.html

M* MoneyMadam

Sunday, June 30, 2019

GONE FISHIN'

I am on vacation.  

Working on a $200,000 portfolio that earns 4.3%.  

M* Money Madam

Tuesday, June 11, 2019

Another CAT call worth consideration

Yes, I still own some Caterpillar symbol CAT.  It has been an interesting ride on this big yellow money machine. 

Revenues peaked in 2012 then precipitously fell in response to global slowing.  My readers know I like stocks that fill the funnel with revenues which leads to earnings and dividend payouts  Therefore, it is odd when I add a stock with a suspect revenue history.

My theory is that CAT is more facile with its business operations than the average investor thinks.  They have been able to raise dividends because they manage their earnings well.  Lay that management execution over the improvement in business activity and we have the foundations for continued dividend payouts and dividend growth.

CAT has a rather large debt to equity ratio (D/E) at just over 2 but that is within industry standard.

Caterpillar's fundamentals are listed below.  Note the revenue trend has reversed and is growing.  Their 2019 first quarter revenue was an increase of  4.7% over first quarter revenue in 2018.  This is good news.







Yet, I am not so enamored with CAT that I am not willing to lose the shares I just added.   With that in mind, I sold an immediate call on CAT.   The table below presents the details of the covered call.  





I added CAT at $128 today.  I immediately sold a $140 August 16, 2019 call receiving a $1.55 call premium.  The expiration date is after the next ex-dividend date of July 19, 2019 which means I should also bank the quarterly dividend.   Add it all up and if they take my new shares at $140 my return is 11.34% on those shares in less than 2 months.

If I end up keeping CAT, I just added the premium of $1.55 to CAT's income.  With a full year of dividends and this one call, income from CAT adds up to $5.67 ($4.12 dividend + $1.55 call premium.)   That folks is an income yield of 4.42%.   Anything over 4% meets my target income goal.

The fact that I write a lot about CAT and execute these calls is evidence that CAT is a good stock to hold over time and work it for income.

M* MoneyMadam
Disclosure:  Long CAT with calls


Wednesday, May 29, 2019

Two calls in a down market while I nibble

One problem of selling calls on quality stocks is that when they are called away at your strike price, quite often their stock prices continues to go up and you lose that opportunity.

The other problem with selling calls on even quality stocks is that you are stuck with the stock until the expiration even if the stock price is sinking.

Our current market makes clear the second risk preempts the first.  Readers know I work my portfolio with calls.  Often times I am in and out of stocks once of two a year.  I am unafraid of each risk noted above because I try to pick quality stocks.   

I added a small amount of two quality stocks today and immediately sold calls on them.  One stock carries a low dividend yield but all other Dividend Machine fundamentals are in order.  The other stock carries a high dividend yield and has a little more debt than I like, but I believe it is a quality stock that will continue to pay their big yield.

I like to get a minimum of 10% total return; capital gain, call premium, and dividend; when I buy a few more shares and sell a call for no other reason than to reap income.  Here are my two trades today.

Microsoft, symbol MSFT

























Dividend fundamentals include earnings of $4.50 are greater than dividend of $1.84 and debt to equity ratio of .77.  Negative is low yield of  1.47%


IBM, symbol IBM


























Dividend fundamentals include earnings of $9.50 are greater than dividend of $6.48.  Debt to equity ratio is 3.03 and that is a negative but it is offset by a dividend yield of 5.01% with plenty of cash flow to pay it. 


Nibbling for income.   Disclosure:  Long MSFT and IBM with calls

M* MoneyMadam

Wednesday, May 15, 2019

Macy's big dividend and a catalyst for growth


This is the first new name I have added to my portfolio of income stocks this year.  My motivation is strictly to move some more money into income from a high yielding dividend stock.  I always hope for capital appreciation and I am always nervous about stock price deterioration, but when I find a stock with a low P/E and a high yield, I look further.

  • Robust 6.7% Dividend Yield
  • Price Earnings ration less than 7
  • Strategic moves to take on head winds
  • Call Option support


Stocks are cheap for a reason and Macy’s has every reason to be cheap.  Macy’s, symbol M, is in the retail sector.  All the oxygen in this space is being consumed by Amazon.  Macy’s has the scale needed to compete in their narrow range of retail.  Macy’s has good cash management suggesting it will continue to pay the dividend.  Macy’s is very near the 52 week low with a very low price earnings ratio known as P/E ratio.



Macy’s Dividend Machine Fundamentals:

The table below presents the criteria I use to pick dividend stocks.   Earnings must exceed dividends paid out; dividend must beat any U.S. Treasury, dividend should grow, and D/E (debt to equity ratio) should be 1 or less or within industry standard.  
5/15/2019
M E.P.S. Dividend Yield 3 Yr Div Growth D/E Ratio
$21.94 $3.56 $1.51 6.88% 0.00% 0.74



Macy’s fails on recent dividend growth but meets all the other hurdles. If you go back five years, the dividend has increased 20.45% or 4.13% per year.   We do not know the direction the dividend will take but we have some factors that are positive.





Dividend History is important.  They have managed to pay a dividend through several periods of disruption.  This is comforting as I am hoping to cash these dividends for 10 – 20 years. 

I also like to see growing revenue because that fuels earnings which fuels dividends.  One of the reasons M is cheap is that future growth of revenues is speculative.  





This is not an encouraging pattern as you can see.  And, that is why M is selling with a P/E under 7.  I am hoping for no less than stable revenue to drive the current dividend.  But I really do think the catalyst for future revenue growth and future potential dividend growth lies in the strategic changes Macy is making right now.



I think Macy’s is on the right track.  Read this link on how they are transforming their effort to include more digital sales.  https://www.businessinsider.com/macys-digital-transformation-continues-to-fuel-profit-2019-5 Based on the earnings reported today, they feel they are making distinct progress. 

Regarding Dividend Machine fundamentals.  I consider Macy’s a good risk at this point.  

Is a non dividend growth stock worth the effort?

If you buy a stock with dividend yield of 2.5% but with dividend growth of 10% would that be a better investment for income investors than a stock like Macy’s which pays a 6.4% yield with no dividend growth.   I used a $20,000 investment in each stock in this scenario.

It would take 11 years of dividend growth to achieve the same income from the higher yielding stock.  Young wealth builders with long time horizons should do a different analysis that includes dividend reinvestment and potential stock price appreciation. 

This analysis is for investors who rely on income and have a diversified portfolio.  Over 6% dividend yield is hard to find especially at such a cheap price.








Adding Macy’s with implied support from call option buyers



I added Macy’s today with a cost basis of about $22.00.   I see some positive support from calls.  I prefer to keep my call expirations under 90 days.  The call presented below has an expiration date of 8/16/2019.  I will cash the dividend along with the premium if I took this call.  I probably will not sell the call on the position I am building.  However, if the calls stay this robust, I just might take a larger position than usual and sell calls on some of it.




















Macy’s is good stock for income investors to consider for their portfolios.  M has good Dividend Machine fundamentals except for dividend growth, and it has a catalyst that just might make it a home run.



M* MoneyMadam

Long M
May 15, 2019 First Quarter Earnings Report