Showing posts with label covered call options. Show all posts
Showing posts with label covered call options. Show all posts

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



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Tuesday, September 3, 2013

Dividends & Income - How to Manage Microchip Technology - My Favorite Trade Today


Consider a smaller cap dividend company like Microchip Technology (MCHP) to provide diversification by company size and to juice your income.




Everybody is writing about Intel (INTC) and Qualcomm (QCOM) and IBM.  They suffer over the earnings, the slow growth, the future and of course the dividends.


These very large companies are good stocks to own but every income investor needs to be diversified by capitalization as well as industry.   The results of my work using my dividend machine strategy suggests that you can create a well diversified portfolio of dividend stocks using my four criteria and moreover, the smaller cap. companies perform quite well.

My Favorite Trade Today:

Image representing Microchip Technologies as d...
Image via CrunchBase
Today's I sold another call on Microchip Technology (MCHP.)  This was my favorite trade today. 


I have profiled MCHP as a dividend machine three times already.   The cost basis each time was $33.55 on November 14, 2010 (a 2011 dividend machine;)  $37.30 on February 8, 2012 (a 2012 dividend machine;) and $33.94 on February 7, 2013 (a 2013 dividend machine.)  

Clearly, MCHP has been up and down and that volatility has provided for very nice covered call income while I cash those ever increasing dividends.


MCHP Covered Call Analysis:


For the purpose of analysis, I will use the high basis of $37.30.    Today I sold a January $42 call for $1.00.    MCHP's all time high is $41.78.   I doubt that it will break out above $42 but someone else does and that is why they paid me $1.00 per share of additional income.   If I keep MCHP through to expiration, I will also receive their quarterly dividend in December.   See the table below to learn about the call  yield and the total gain opportunities.






Folks, this is how you work your dividend machines to maximize profit.


The Money Madam

Posts Related to MCHP as a Dividend Machine
2013-dividend.html

November 14, 2010
http://www.themoneymadam.com/2010/11/microchip-technology-dividend-machine.html

February 8, 2012
http://www.themoneymadam.com/2012/02/microchip-technology-dividend-machine.html




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Tuesday, August 27, 2013

Dividends and Income –Breaking News - Kimberly Clark has covered call options



How often am I asked “what is my entry point” on any given stock?   My answer is always the same; I use my four dividend machine criteria to guide me.     



When a company meets all four of the criteria I use to define a dividend machine (EPS greater than the dividend; dividend of greater than three percent; dividend increases every year for a minimum of seven years and D/E ratio of one or less or equal to industry standards), I almost always begin a position in that stock or I add to it, if I already own it.



My newest 2013 stock to qualify as a dividend machine is Kimberly Clark, symbol KMB.   In February of 2011, KMB also was a dividend machine. Click here for a link to that post.  In 2011 the stock price was $65.06 and the dividend yield was 4.8 percent.   In 2012, KMB stock price appreciated quite a bit and I did not include it in that portfolio.




I held KMB until it reached a high of $106 in early 2013.   The current dividend yield at that price had slipped to barely three percent and I locked in a big gain by setting a stop at $103.  My stop was hit and I moved that money into another stock that paid more than three percent.




Today, I am again interested in KMB.   Not only does this fine company qualify as a dividend machine, it has an interesting covered call that is fit for an income investor.  Let’s take a look at the dividend machine fundamentals of KMB and then at the covered call.  




KMB - DIVIDEND MACHINE FUNDAMENTALS:


This table presents KMB’s dividend machine fundamentals.   At the close on Monday, August 26, 2013, KMB traded at $94.53 nearly a ten percent correction from where I sold it.   Earnings are $4.51 per share with dividends at $2.64 the yield is 3.38%.  Debt to equity is 1.53 which is pretty typical for KMB and less than other companies in this space.  



I do not use sentiment or trends to guide me to buy a stock.  I use these dividend machine criteria and that strategy has worked out very well.  Just on the dividend machine fundamentals, I am interested in adding KMB for income.  But the covered call opportunity is what sends this stock to the stop of my list for tomorrow, Tuesday August 27.




KMB - COVERED CALL OPPORTUNITY


I am partial to companies that provide more than just dividend income; I like stocks with both dividend and covered call income.   Covered call income is usually associated with growth stocks rather than a stogy company like KMB.



The call I have in mind is a January $100 for a premium of $1.53 per share.   It is rare to find that kind of income on a stock like KMB.   Furthermore, going out to January means that if I hold the stock until expiration, I will also receive two dividends.   This table shows the gain from this covered call.   




If I lose KMB again at $100, it will be my pleasure to pocket the more than 9 percent gain.   If KMB just hangs around in the mid $90’s and I still own it, I have the pleasure of at least a 3.38% dividend yield on a stock that has increased the dividend for 41 consecutive years.   Moreover, I always get to keep the call premium which in and of itself is a yield of 1.62 percent.


A Money Madam’s dividend and income strategy for conservative income investors.  



THE MONEY MADAM
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