jr6035
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But O is at $70 today. But i'm still learning.
Selling Covered Calls and Naked Puts
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But O is at $70 today. But i'm still learning.
NW-Bound
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I don't follow O, and looked at its fundamentals just now out of curiosity.
The way DR1959 does it, he is willing to give up a lot of potential gain on the stock appreciation, in return for protection against a decline. Basically, he is happy just to get the dividend, and still gets some protection against the stock price drop.
The way other traders and I do it, we take more risk, in order to participate in some stock gains. If the stock shoots to the moon, we get our gain capped, hence trail the buy-and-holders. But if the stock is slow moving or stagnant or declines, we beat the buy-and-holders.
That's the beauty of stock option. It can be as risky, or as conservative as one wants. It all depends on how one uses it. It is not always about "going for broke" as the uninitiated think.
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The prices does not matter!
Say you buy O today
Price is $70.76 today
So 100 shares is $7076
A $55 option for January 2023 is about $16
So they pay you $16 to buy your O anytime before January 2023 for $55
Your net investment out of pocket today is $7076 - $1600 = $5476 or $54.76 a share. So if you get called at $55 you only make .24 or $24 on a 100 shares.
But if you start collecting the dividend and don't get called, you are getting
$23.55 per month on a $5476 investment which annulized is 5.16%
So a pretty safe 5% with downside protection to $55 a share from $70.
Now, as NW Bound point out, you are giving up all stock appreciation. This is the conservative way to play. For a retired income investor, this is a great path.
If you want more risk and more reward you can write a call that is higher than $70. Any option written in the money will probably get called at some point, for me, I can ride this for a few months and even when I get called, I made money!
jr6035
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Ok. I already own about 400 shares of O. I own it for the dividend. Should i sell covered calls on it? Just curious. I want to stay conservative.
bobandsherry
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Nice example.... what's interesting is you could get downside protection to $37.50 for even better return. I just looked at the options, using your example above, here's updated with call at $37.50.
Price is $70.76 today
So 100 shares is $7076
A $37.50 option for January 2023 is about $33
So they pay you $33 to buy your O anytime before January 2023 for $37.26
Your net investment out of pocket today is $7076 - $3350 = $ or $37.26 a share. So if you get called at $37.50. you only make .24 or $24 on a 100 shares.
But if you start collecting the dividend and don't get called, you are getting
$23.55 per month on a $3726 investment which annualized is 7.6%. And you have further downside protection.
bobandsherry
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Agreed, but DR1959 play is better than putting into a CD
He is OK with collecting the dividend, but he's collecting it against a lesser amount of investment. This seems like a solid way to lock in a decent return. Based on the pricing I pulled with a $37.50 call with 7.6% return for 17 months that rates up there with some of the returns one could get on a preferred issue with higher risk. There is risk is dividend gets reduced (or suspended) but based on the historical payout that doesn't seem likely. More likely that dividend gets increased by another penny.
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bobandsherry
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For those interested in play like DR1959, VZ is another good stock to look at. $30 strike for a Jan23 expiration is $55.13 stock price, offset by $25.42 option premium, or net of $29.71/sh. It's paying .6275 dividend, annualized that's 8.5% (XIRR is 9.8%). VZ is a solid company.
NW-Bound
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Agreed, but DR1959 play is better than putting into a CD
Agreed. The dividend rate by itself is already higher than the CD rate, and the reduced principal via the option premium makes it even better. And the option provides some partial protection if the stock price drops.
I don't sell in-the-money calls, so do not know how long they last on the average until they get assigned. That seems to be the major drawback.
And if the stock looks like it is on the way down, I guess you need to monitor it to close out the play, lest you lose money on the principal.
aja8888
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Sold another call on my 1,000 shares of Ford at $15.
Sold a put on JNJ of $165 for 200 shares. I've always wanted to hold JNJ but never bought it. Maybe this will get me into a position.
I had a sell/put order in for 1,000 T shares but it didn't get sold. I'll try again tomorrow.
Just pickin' along and makin' a few bucks here and there.
Sold a put on JNJ of $165 for 200 shares. I've always wanted to hold JNJ but never bought it. Maybe this will get me into a position.
I had a sell/put order in for 1,000 T shares but it didn't get sold. I'll try again tomorrow.
Just pickin' along and makin' a few bucks here and there.
Sniggle
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Sold another call on my 1,000 shares of Ford at $15.
Sold a put on JNJ of $165 for 200 shares. I've always wanted to hold JNJ but never bought it. Maybe this will get me into a position.
I had a sell/put order in for 1,000 T shares but it didn't get sold. I'll try again tomorrow.
Just pickin' along and makin' a few bucks here and there.
I have been meaning to grab some F. I think I have enough change left in my account to sell a few CC puts at $13.
May both our options expire worthless[emoji3]
pb4uski
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Agreed, but DR1959 play is better than putting into a CD
There is risk is dividend gets reduced (or suspended) but based on the historical payout that doesn't seem likely. More likely that dividend gets increased by another penny.
I have a bunch of 2.25% CDs maturing this month. Something to think about.
VZ closed at $55.15 and the bid for a Jan 20, 2023 call at $30 is $23.55... so assuming I took the bid my net investment is $31.60. Annual dividends are $2.51 so that would be a 7.94% yield for 17 months.
O closed at $70.61 and the bid for a Jan 20, 2023 call at $30 is $38.00... so assuming I took the bid my net investment is $32.61. Annual dividends are $2.83 so that would be a 8.67% yield for 17 months.
I'm assuming that this is worsk case and I would likely be able to sell the call somewhere between bid and ask and that would make it even better.
Is my understanding correct? Other than a HUGE drop in price that persists to Jan 2023 or the dividend being reduced or counterparty risk, what am I missing?
So in my AA are these fixed income or equities?
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aja8888
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jr6035
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What is this option strategy called? Bear with me, I'm new to this.
pb4uski
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I have a bunch of 2.25% CDs maturing this month. Something to think about.
VZ closed at $55.15 and the bid for a Jan 20, 2023 call at $30 is $23.55... so assuming I took the bid my net investment is $31.60. Annual dividends are $2.51 so that would be a 7.94% yield for 17 months.
O closed at $70.61 and the bid for a Jan 20, 2023 call at $30 is $38.00... so assuming I took the bid my net investment is $32.61. Annual dividends are $2.83 so that would be a 8.67% yield for 17 months.
I'm assuming that this is worsk case and I would likely be able to sell the call somewhere between bid and ask and that would make it even better.
Is my understanding correct? Other than a HUGE drop in price that persists to Jan 2023 or the dividend being reduced or counterparty risk, what am I missing?
So in my AA are these fixed income or equities?
Ok, one thing I was missing was that if it is called I get the $30 strike, which could be less than my net investment, which cuts into the yield. Using the numbers above for VZ and O using the midpoints of bid and asked, I get the following:
| VZ | |
| Stock-Bid | 55.16 |
| Stock-Ask | 55.18 |
| Call-Bid | 23.55 |
| Call-Ask | 27.05 |
| XIRR | 7.82% |
| 08/09/21 | -29.870 |
| 11/01/21 | 0.628 |
| 02/01/22 | 0.628 |
| 05/01/22 | 0.628 |
| 08/01/22 | 0.628 |
| 11/01/22 | 0.628 |
| 01/20/23 | 30.000 |
| O | |
| Stock-Bid | 70.5 |
| Stock-Ask | 70.74 |
| Call-Bid | 38 |
| Call-Ask | 43 |
| XIRR | 9.92% |
| 08/09/21 | -30.120 |
| 08/15/21 | 0.236 |
| 09/15/21 | 0.236 |
| 10/15/21 | 0.236 |
| 11/15/21 | 0.236 |
| 12/15/21 | 0.236 |
| 01/15/22 | 0.236 |
| 02/15/22 | 0.236 |
| 03/15/22 | 0.236 |
| 04/15/22 | 0.236 |
| 05/15/22 | 0.236 |
| 06/15/22 | 0.236 |
| 07/15/22 | 0.236 |
| 08/15/22 | 0.236 |
| 09/15/22 | 0.236 |
| 10/15/22 | 0.236 |
| 11/15/22 | 0.236 |
| 12/15/22 | 0.236 |
| 01/15/23 | 0.236 |
| 01/20/23 | 30.000 |
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bobandsherry
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Yep, if it's assigned you have the risk which is why you want to find the strike where your net is below the strike. If it were to be called you'd still make something. Use Limit to set a price.
For VZ, you are missing one dividend. It goes ExD the month before (last was 7/8 with payable date of 8/2). As this expires 1/20 that would be prior to the ExD for Jan but would be paid out 2/1.
For IRM you start you div one month early, next ExD is 9/14, but same as VZ you'll collect one more so it nets out, just that your XIRR is slightly off.
Lastly, look at Open Interest, that's useful in making a decision.
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bobandsherry
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IRM is another you may want to look at, $25 has decent return and open interest.
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bobandsherry
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Some would call it "crazy" - LOL..... I'm not sure of it being called anything more than a Deep In The Money Covered Call w/LEAPs. Maybe someone else knows of a specific strategy name.
Running_Man
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I have a bunch of 2.25% CDs maturing this month. Something to think about.
VZ closed at $55.15 and the bid for a Jan 20, 2023 call at $30 is $23.55... so assuming I took the bid my net investment is $31.60. Annual dividends are $2.51 so that would be a 7.94% yield for 17 months.
O closed at $70.61 and the bid for a Jan 20, 2023 call at $30 is $38.00... so assuming I took the bid my net investment is $32.61. Annual dividends are $2.83 so that would be a 8.67% yield for 17 months.
I'm assuming that this is worsk case and I would likely be able to sell the call somewhere between bid and ask and that would make it even better.
Is my understanding correct? Other than a HUGE drop in price that persists to Jan 2023 or the dividend being reduced or counterparty risk, what am I missing?
So in my AA are these fixed income or equities?
What is stopping anyone from buying the call, immediately exercising, selling the stock and pocketing the $261 per 100 shares in a single day?
bobandsherry
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Here's an example using VZ covered call including dividends. This shows the return based on if Not Called (NC) vs Called for each of the strike prices as of close yesterday. If NC it doesn't try to guess what loss in price would be, just shows the downside protection.
As you move deeper in the money the yield dips and then starts to rise. Depending on your risk tolerance, you can play covered call at different strike and possible return.
As you move deeper in the money the yield dips and then starts to rise. Depending on your risk tolerance, you can play covered call at different strike and possible return.
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bobandsherry
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Look at the difference in the "Bid" and "Ask".
NW-Bound
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Nothing.
I believe market makers or dealers would have their computer spotting an arbitrage opportunity like this, and immediately executing both trades.
What happens is that as the price of a stock varies during a trading day, the bid/ask of its options also varies up/down to track the stock, particularly for in-the-money options. When doing trades like this, you want to enter the two trades together, meaning the buying of the stock and the selling of the option getting entered together as a "buy/write" order. Else, you may win or lose money immediately, depending on how the stock price moves.
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pb4uski
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Where did you get the chart?
bobandsherry
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Where did you get the chart?
I have a spreadsheet that I use to do my analysis of options. I scrape the quotes off E-Trade and copy/paste into my spreadsheet. It gives me quick overview and if I should do a deeper review. Here's the details.
bobandsherry
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Those computers are working day and night, so gotta buy so your net is less than the strike price value. Those computers will suck in trades for nickels and dimes
Agree to buy together as "buy/write".bobandsherry
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Buying deep in the money covered calls on dividend stocks is not a strategy I've used before. Concept is interesting, so with a few bucks sitting idle I decided to use a portion to test the strategy.
I bought PFE, VZ and then a wild card AGNC (since it has monthly dividend) with short term 1/21/22 expiration.
PFE: $20 Strike / $48.02 Purchase / $28.07 Premium / $19.94 Net = 9.5% XIRR
VZ: $35 Strike / $55.15 Purchase / $20.19 Premium / $34.95 Net = 8.5% XIRR
AGNC: $5 Strike / $16.15 Purchase / $11.12 Premium / $5.03 Net = 28.9% XIRR
I went as deep as long as net was below strike (AGNC was as close as I could get). I'm expecting assignment as Ex-Div date comes around, but worse case I make a couple bucks. Best case I make a decent return on short-term cash.
I bought PFE, VZ and then a wild card AGNC (since it has monthly dividend) with short term 1/21/22 expiration.
PFE: $20 Strike / $48.02 Purchase / $28.07 Premium / $19.94 Net = 9.5% XIRR
VZ: $35 Strike / $55.15 Purchase / $20.19 Premium / $34.95 Net = 8.5% XIRR
AGNC: $5 Strike / $16.15 Purchase / $11.12 Premium / $5.03 Net = 28.9% XIRR
I went as deep as long as net was below strike (AGNC was as close as I could get). I'm expecting assignment as Ex-Div date comes around, but worse case I make a couple bucks. Best case I make a decent return on short-term cash.
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