Monday, February 11, 2019

Nvidia very short term call for income

Nvidia, symbol NVDA is not exactly a dividend machine but it does pay a dividend.  Yet, in this trade today, the dividend is irrelevant as the call expiration is 4 days.  Nvidia's next expected ex-dividend date is later in February.  The point of this call is simply quick income.

I don't really want to own NVDA as a long term holding.  I am hoping to make a quick 2 percent of income in 4 days and bag a small capital gain should NVDA be called away.  If it is not called away I will sell it right away provided it is at or above my cost basis less the income from the call.  The adjusted cost basis in this case would be $146.09 less the income from the premium of $3.00 or $143.09. 

If it is above my cost basis, I will probably continue looking for short term calls until NVDA is called away.   I have done this before with NVDA.  This is not a conservative investor's trade.  It is controlled risk to boost income. 

Nvidia's Fundamentals:

NVDA has good enough fundamentals that I am not too worried about it going belly up.  However, it is extremely volatile and could sink to the 52 week low or go lower on some catalyst that I do not know about.

Short Term Call:

Call prices vary all day long.  You may not be able to get this trade tomorrow and I could not get this published before the market closed.  Yet, you may be able to do even better.  It all depends on the call buyers.

Pressure is being placed on corporations to not pay out dividends.  We income investors are already suffering from having no safe place to earn income and with dividend payouts pressured, covered calls become even more important.

If you have cash to put work, consider a trade like this.

M* MoneyMadam
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Wednesday, February 6, 2019

Western Digital is a laggard but call activity looks good

Western Digital is a chip maker that has suffered.  WDC sports a really good yield above 4%.  Balance sheet as measured by D/E (debt to equity) ratio is good; D/E = .97.  P/E is just a bit high at 17.4.

The call illustrated below captures the next expected dividend with the ex-div date about March 28, 2019.  I picked an expiration date of April 18, 2019 and a strike price that I think WDC will not meet.
Although WDC could easily be called away as the 52 week high is over $100.   If it is called away, I will book my profit with pleasure.

With this trade I add a solid income stock with call potential.  Beta is 1.17 (source Nasdaq) which provides for call selling opportunities.  

The negative feature is no dividend growth.  WDC has held the dividend steady for four years.  However, prior to 2015, dividends were increased regularly.  Revenue growth is quite good at 14.8% and payout ratio of dividends to free cash flow is only 20%.  I think it is a safe investment for conservative income investors.

M* MoneyMadam

Disclosure:  Long WDC with calls
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Skyworks Surges a few calls to consider

I own Skyworks, symbol SWKS, and I trade it by using covered calls because the dividend is a paltry 1.78% which is too low just to hold it.  

The call illustrated below is of interest to me.  It captures the quarterly dividend as the expiration date is after the ex-dividend date of 2/28/19.  When you add in the call premium, your income yield goes up to 2.25%.   If you are called away you get some capital gain. 

SWKS is on solid ground: no debt, a P/E ratio less than 15 and good revenue growth.  SWKS is volatile enough, beta is 1.28 (source Nasdaq) that you can sell calls several times during a year.

Now if you want to go out further with a higher strike price and bigger premium, consider the May, 17, 2019 expiration with a $95.00 strike price.

Several options (pardon the pun) for a conservative income investor.

M* MoneyMadam

Disclosure:  Long SWKS with calls
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Thursday, January 24, 2019

CAT calls

I have been busy working a few positions and Caterpillar is one of them.  Caterpillar, symbol CAT, has been quite an income machine but it has also caused a lot of concern.  Caterpillar requires a lot of capital to build and distribute its big yellow machines.   CAT is very dependent on global growth.  I keep thinking some day Syria will be rebuilt and Caterpillar should benefit from that project.  While we wait for these catalysts, CAT is back to my basis. 

  • Waiting for a catalyst to boost Caterpillar's stock price.
  • Selling covered calls with a strike above my basis to capture more income than just the dividend.
  • Willing to lose CAT should the call be assigned because that will lock in gains and will make my portfolio safer as CAT has a very high D/E ratio.

At my age, I need a portfolio that creates income and I cannot live on 2.20% from rolling C.D.''s (certificates of deposit.)  With the dividend yield of 2.61% being less than I need, which is 4-5%, I turn to calls to boost my income.   The first table below shows the dividend machine fundamentals of CAT. 


To remind you, I like Dividend yield to exceed the 2 year Treasury at a minimum and CAT meets only that minimum.  Other dividend machine criteria include EPS greater than dividend paid out, dividend growth greater than implied inflation (3.8% annual inflation is a good number to use as it is the average over my investment life,)  

CAT is an excellent dividend grower and right now EPS are greater than dividend payout.  Finally a strong balance sheet is very helpful if you want to sleep at night without fear of the company having to reduce or cut the dividend or even go out of business.

CAT is volatile with a 52 week trading range of $173 - $112 making for some nice calls.  The table below shows a call I sold today.  

I selected a call expiration date of April 20, 2019.  The duration of the call provided a bigger premium.  However, the next ex-dividend date is expected to be right around the call expiration date and this means I may not get the dividend.  Of course, if the call expires as 90% do, I will get to pocket both the dividend and the call premium.  The next table shows the yield with the dividend included.

The difference is the yield from both the call and the dividend.  Unless the call is assigned, I will not book the capital gain, I will book only the combined amount of the dividend and the call premium.

This is just one example of working the portfolio for income.

M* MoneyMadam

Disclosure:  Long CAT with calls

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