I am frequently asked by subscribers if there are any possible ways to boost returns on stocks that pay large dividends
My response is always the same - the most common and effective way to boost returns in a high-yield portfolio, without selling the stock, is to use a covered call strategy.
I want to tell you that most people will never use options. They think they're complicated or risky.
This misconception is simply not true.
Let's be clear - ANY investment has some risk. Each comes with its own type; be it stock price volatility, company specific risk, regulatory risk, currency risk - you get the picture.
Naturally, options have their own unique characteristics. And once you get the hang of it, buying and selling options is NO different from buying or selling shares of stock.
My covered call options strategy entails owning shares of a company that also has listed options available. For every 100 shares that you own, a covered call strategy would have you sell one call option (every options contract is for 100 shares) with an expiration date at some time in the future. Typically, the price (strike price) that you choose is above the current market price of the underlying stock when selling a covered call.
Selling a call against shares you own gives the buyer of the call the right to buy those shares at a predetermined date in the future, and at a given price.
For instance, say you own 100 shares of a $10 stock, and say you can sell calls against those shares at $12.
If the stock hits $12, the buyer can buy or "call" those shares away from you at $12. But regardless of whether the stock hits $12 or not, you ALWAYS get to keep the initial option premium (the money!).
Why do this?
Because it lets you collect MORE income from the stocks you already own.
In most cases, I use options that are 1-3 months away from expiration and those that are out of the money. This allows for the stock to advance before the strike price is hit.
This strategy should be employed if you believe a stock is a long-term hold, but think that it could suffer short-term weakness or struggle to break through overhead resistance. Selling calls on stocks in these situations allows you collect the option premium (the money!) while simultaneously collecting dividends from the underlying stock. Another good reason for selling a covered call is if you think the market as a whole is due for a pullback. This would help to neutralize the downside of a stock you otherwise want to continue to hold.
Here's an example. Say you own 1,000 shares of Altria MO. It currently trades at around $26.93 with a dividend yield of 5.6 percent. Say you decide to sell 10 call options that give someone else the right to buy your shares from you for $28 per share, anytime between now and September options expiration. At current prices, you'd get paid about $280 for these options ($0.28 per contract * 10 contracts * 100).
As long as Altria closes below $28 at September options expiration, you get to keep your shares, and the $280 is yours to keep. Looking at the stock's price history, Altria has bounced between $25.50 and $27.50 for the past three months. What that means is that if you used the covered call strategy repeatedly over time, you could have earned a lot more income in addition to the dividends you got along the way.
In fact, as it turns out, you would have doubled your quarterly dividend return. This won't always be the case, but it's a good example of how a covered call can help you boost your income.
Okay, I fully recognize that options aren't for everybody.
That's why I've put together a simple report on one more way to increase your dividend income. The secret is to pay less for your dividend stocks. That increases your gains automatically.
If you're interested in reading this report, check out the full write-up by clicking here now.
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I want to tell you that most people will never use options. They think they're complicated or risky.
This misconception is simply not true.
Let's be clear - ANY investment has some risk. Each comes with its own type; be it stock price volatility, company specific risk, regulatory risk, currency risk - you get the picture.
Naturally, options have their own unique characteristics. And once you get the hang of it, buying and selling options is NO different from buying or selling shares of stock.
My covered call options strategy entails owning shares of a company that also has listed options available. For every 100 shares that you own, a covered call strategy would have you sell one call option (every options contract is for 100 shares) with an expiration date at some time in the future. Typically, the price (strike price) that you choose is above the current market price of the underlying stock when selling a covered call.
Selling a call against shares you own gives the buyer of the call the right to buy those shares at a predetermined date in the future, and at a given price.
For instance, say you own 100 shares of a $10 stock, and say you can sell calls against those shares at $12.
If the stock hits $12, the buyer can buy or "call" those shares away from you at $12. But regardless of whether the stock hits $12 or not, you ALWAYS get to keep the initial option premium (the money!).
Why do this?
Because it lets you collect MORE income from the stocks you already own.
In most cases, I use options that are 1-3 months away from expiration and those that are out of the money. This allows for the stock to advance before the strike price is hit.
This strategy should be employed if you believe a stock is a long-term hold, but think that it could suffer short-term weakness or struggle to break through overhead resistance. Selling calls on stocks in these situations allows you collect the option premium (the money!) while simultaneously collecting dividends from the underlying stock. Another good reason for selling a covered call is if you think the market as a whole is due for a pullback. This would help to neutralize the downside of a stock you otherwise want to continue to hold.
Here's an example. Say you own 1,000 shares of Altria MO. It currently trades at around $26.93 with a dividend yield of 5.6 percent. Say you decide to sell 10 call options that give someone else the right to buy your shares from you for $28 per share, anytime between now and September options expiration. At current prices, you'd get paid about $280 for these options ($0.28 per contract * 10 contracts * 100).
As long as Altria closes below $28 at September options expiration, you get to keep your shares, and the $280 is yours to keep. Looking at the stock's price history, Altria has bounced between $25.50 and $27.50 for the past three months. What that means is that if you used the covered call strategy repeatedly over time, you could have earned a lot more income in addition to the dividends you got along the way.
In fact, as it turns out, you would have doubled your quarterly dividend return. This won't always be the case, but it's a good example of how a covered call can help you boost your income.
Okay, I fully recognize that options aren't for everybody.
That's why I've put together a simple report on one more way to increase your dividend income. The secret is to pay less for your dividend stocks. That increases your gains automatically.
If you're interested in reading this report, check out the full write-up by clicking here now.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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