An Easy Strategy For Hedging 2011 Apple Gains

Posted on December 30, 2011

By Robert Hauver

If you were blessed with enough foresight to buy AAPL earlier in 2011 when it dipped, you probably have a profitable unrealized gain right now. Once again, Apple was one of the best stocks to buy this year for price gains, rising over 24%, from $325.64, to approx. $405.12, as of 12/29/11.

Even though Apple doesn’t currently pay dividends, and isn’t normally part of our coverage of dividend stocks, in last week’s article we wrote about a lucrative, conservative strategy you can use to create your own AAPL dividend that has a higher yield than many high dividend stocks do.

This week’s article details one more way you can create decent income from Apple, and/or, if you now own AAPL shares, you could lock in a good % of 2011′s price gains. With so much uncertainty ahead in 2012 – a US presidential election, ongoing Eurozone debt problems, etc., many forecasters are predicting another volatile year in the market.

Selling Covered Calls is a strategy for hedging some of your downside risk on a stock, that offers you immediate income, and also has tax deferral advantages. Since you only pay taxes on your options gains for the tax year in which the option expires or is closed out, you can often get tax-deferred use of your option income for 1-2 years.

For example, suppose on Jan. 3, 2012, you sell AAPL call options that expire in Jan. 2013. You get paid the call premium within 3 days of the sale, but you don’t have to report this income and pay taxes on it until April 2014, if you let it expire in Jan. 2013.

You can see more info on over 30 high yield Covered Calls trades discussed in our other recent articles in our Covered Calls Table.

Some of the key decisions to make when selling covered call options are:

1. How far out in time to sell covered calls – Generally, the further out in time you sell, the higher the premium, due to the time value of the options. The trade-off, however, is the additional uncertainty of going further out into the future. Currently, there are AAPL options available in 2012-Jan, Feb, March, April, and Oct.; Jan 2013; and Jan 2014. AAPL usually has high options yields and strong volume/liquidity, and there are many options to choose from.

This table below compares the current expiration months, using the same $410.00 strike price, with AAPL’s 12/29/11 price as a cost basis.

Call option premiums increase as you go further out in time, giving you a lower break-even, but a lower annualized yield also:

AAPL-TIME-405

“Static Break-Even” equals the difference between the stock’s cost of $405.12, and the call bid premium for each month’s strike price. If the stock remains static, (it doesn’t rise above the strike price at or near expiration), then the stock usually doesn’t get assigned/sold away from you. You keep your shares, and move on. If the stock does rise above your strike price, your AAPL shares will get assigned/sold, and you’ll earn an additional profit. (In general, most assignments occur at or near the time of expiration.)

In the above examples, we used a $410.00 strike price, which is $4.88 above the $405.12 cost of AAPL. This represents your potential assigned gain. To calculate your total gain, just add the call bid premium to the potential assigned gain. Ex.) For the March 2012 $410.00 call, you’d receive a $21.05 call bid premium. If AAPL rises higher than the $410.00 strike price, most likely your shares will be sold/assigned, and you’ll also earn an additional $4.88 in price gains, for a total gain of $25.93.

How to hedge your 2011 price gains: The table below uses AAPL’s 1/3/11 $325.64 price as a cost basis, and shows what % of AAPL’s year-to-date 2011 profit you could hedge, via selling $410.00 covered calls in different expiration months. As usual, the further into the future you sell, the higher premium you get, and the more of your profit you hedge, but your annualized yield decreases. (Note: The call bid premium is based upon what the current bid/offer is for each option, as opposed to the ask/sell price. There’s often quite a spread between the two, so you may be able to sell at a higher premium than the current call bid premium):

AAPL-TIME-325

2. Which call option strike price should I sell at – i.e., Should I choose an option strike price closer to, or much higher than the stock’s current price?

Option sellers usually base this decision upon their take on the market, and the stock’s future prospects for price gains. The more bullish you are on a stock, the further “out of the money”, (above the stock’s current price), you may wish to sell calls at. The reason being that, when you sell a call option, you’re obligating yourself to potentially have to sell the stock in the future, at your sold call option’s strike price, no matter how much higher the stock rises. (Note: 1 option contract corresponds to 100 shares of the underlying stock.)

So, if you feel that AAPL might rise far beyond its current $405.00 price, (as do several analysts), you’d probably choose to sell at a higher strike price than a more bearish investor, who is more interested in locking in current price gains, and creating more immediate income, than in speculating on potential future price gains. Indeed, that’s one of the other attractions of selling covered calls, you know exactly what your upside potential and your downside break-even are before you make the trade.

The trade-off is that call options further above the stock’s price, (out of the money), have a lower premium than those closer to the stock’s price, (at the money), or below a stock’s price, (in the money).

Here’s a comparison of various strike prices, using $405.12 as AAPL’s cost basis to further illustrate this point:

AAPL-STRIKE-405

Your potential assigned price gain per share increases with each higher strike price. However, your downside break-even price also increases.

The table below compares how much % of year-to-date AAPL profit you can hedge, using different strike prices:

AAPL-STRIKE-325

Again, your % of profit hedged declines, as you sell at a higher strike price, but your potential for additional price gains increases $5.00 with each higher strike price, in this example.

A bullish investor might choose a higher strike price for AAPL, leaving himself more potential for additional price gains on top of the current $79.48 year-to-date profit. (The additional price gains are calculated as the difference between $405.12 and the strike price.) A less bullish. or conservative investor may wish to sell at a lower strike price, and hedge more of his year-to-date profit. He’d also have a lower break-even.

Trading Range: If you sold a call at the $420.00 strike price from the table above, your trading range would be:

Max. Price Equivalent of $470.75, ($420.00 strike price plus $50.75 call bid premium), and Downside Break-Even of $274.89, ($325.64 stock cost basis less $50.75 call bid premium).

Valuations: Small wonder that AAPL is so popular with institutional and individual investors, when you consider its strong growth has happened during a period of recession and slow economic growth.

AAPL-PEG

Financials: There’s not much to quibble about with AAPL’s financial metrics either, although many AAPL shareholders would like to see the company join other Tech firms, such as Cisco, and enter the ranks of dividend paying stocks. However, for dividend investors, selling covered calls and cash secured puts offer 2 lucrative alternatives for creating income from AAPL.

(Note: You can see details on over 30 high yield Cash Secured Puts trades in our Cash Secured Puts Table.)

APPL-ROE

Disclosure: Author is short puts of AAPL.

Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.

How To Create An Apple Dividend

Posted on December 23, 2011

By Robert Hauver

Apple still isn’t part of the dividend stocks universe, in spite of its shareholders’ ramped up demands for the company to pay out some of its huge $51 billion cash pile as dividends. However, there’s an effective, lucrative strategy that we’ve often used, via which you can earn a higher yield on AAPL than on most high dividend stocks.

If you had been able to buy AAPL at $291.60 in 2011, would you have taken that risk? How about $302.50? As AAPL’s 52-week range is $310.50 to $426.70, both prices would have been quite profitable. AAPL has been one of best stocks to buy in 2011 for price gains, having risen 23.56% year-to-date.

But if you’re an income investor, not a trader, and AAPL still doesn’t pay dividends, what can you do?

Solution: Create your own “dividend” from Apple via selling cash secured put options below the current stock price, to give yourself the most desirable combo of a lower break-even and highest yield. Even Even though AAPL doesn’t currently pay dividends, we’ll show you below that it does have high options yields which can be very lucrative. The trade-off to manage is that the lower strike price you sell the put options at, the lower your break-even should be, but the lower your yield is.

(Note: You can see more info on over 30 high yield Cash Secured Puts trades in our Cash Secured Puts Table.)

Here are 2 examples of 2011 AAPL put-selling trades:

1. Jan. 2011 Cash Secured Put Selling Trade:

On Jan. 18, 2011, we sold Jan. 2012 $330.00 cash secured puts for $38.40, creating a break-even of $291.60. These put options are worth only $.44 each at the time of this writing.

AAPL closed at $340.65 the day of this first trade, and had a 200-day moving avg. of $280.87, and a 50-day moving avg. of $322.64.

Our break-even of $291.60 was 3.82% above AAPL’s 200-day avg., and 9.62% below its 50-day avg.

AAPL-JAN TRADE

2. Oct. 2011 Cash Secured Put Selling Trade:

On Oct. 4, 2011, we sold July $345.00 cash secured puts for $42.50, creating a break-even of $302.50. These put options are worth only $19.15 each at the time of this writing.

AAPL traded for $372.50 the day of this trade. Its 200-day moving average was $350.55, and its 50-day moving average was $382.55.

Our $302.50 break-even was far below both the long and short-term avgs: 14.27% below the 200-day avg. and 20.9% below the 50-day avg.

AAPL-OCT TRADE

Our Oct. trade was certainly aided by the much higher market volatility present then, as the VIX “fear factor” hit a high of 46.88 the day we made our Oct. trade, vs. its 15.87 close when we made our Jan. trade.

This much higher volatility allowed us to sell put options at a strike price much further “out of the money” in Oct., ($27.50 below AAPL’s Oct. 4th price), vs. selling only $10 below AAPL’s Jan. 18th price.

Timing: In hindsight, the January 2011 trade was a riskier one, even though the break-even was lower, for a couple of reasons:

1. Our break-even was above AAPL’s 200-day average.

2. AAPL had not entered the oversold region yet. You can see at the far left on the stochastic chart below, (bottom chart), that although we placed the Jan. trade just a few days before AAPL bottomed out at a $326 level, it wasn’t until late Feb. that AAPL entered the oversold low point on the chart:

AAPL-BlueChart

We made the Oct. trade when AAPL hit an oversold “valley” on the stochastic chart, and this better timing has played out thus far in accelerating the profit in this trade.

Here’s how the 2 trades compare in amount of total profit realized over roughly similar time periods. The Jan. trade only realized 20.80% of its potential profit in 72 days, while the Oct. trade has realized nearly 55% of its profit in 79 days:

AAPL-2 TRADE COMP

The lesson from these 2 trades is to try to wait for oversold conditions before selling cash secured puts. All other things being equal, this should help you to realize your potential profit sooner, and should also improve your cash flow. This is another example of the old Buffett saying, “Be greedy when others are fearful, and fearful when others are greedy”. In other words, some of your most profitable opportunities will emerge when the market looks bleak. We made the Oct. trade on the heels of the -9.79% Sept. pullback, when US economic data was less rosy, and the European crisis was dominating the news – all in all, a rather dark atmosphere…

What action to take now: Keep this idea in your back pocket and wait. AAPL is currently overbought on the stochastic chart, so wait for the next market downturn, and keep an eye on AAPL’s charts to see when it hits a “valley” low point at 20 or below on its stochastic chart. Volatility has subsided somewhat, but it’ll most likely return soon enough in 2012, given all of the current domestic and global economic and political issues in the news.

To walk through the details and mechanics of a cash secured put trade, please see this article: 2 High Yield Strategies For Hedging Dow Dividend Stocks, which also illustrates a covered call options trade.

The Covered Calls trades discussed in our other recent articles are listed in our Covered Calls Table.

Disclosure: Author is short puts of AAPL.

Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.

2 Defensive Dividend Stocks Outperforming The S&P

Posted on December 16, 2011

By Robert Hauver

Looking to play defense in the market? As the market has vacillated between up and down months since July, income investors are seeking dividend paying stocks with less correlation-i.e., dividend stocks which are defensive during pullbacks, but still share in rallies. It has become more challenging to find such an animal, but they are out there. However, defensive stocks aren’t always the best stocks to buy for growth. These two giant Healthcare dividend stocks, Lilly and Pfizer, have both outperformed the S&P in 2011, in both up and down markets:

LLY-pfe-perf

Performance-wise, LLY and PFE flip-flopped in the Sept. and Nov. pullbacks and the Oct. rally. Lilly just got a nice boost recently, after an analyst said that LLY’s anti-Alzheimer drug could double the share price, if proven to be effective, which he thought it had a 10-20% chance of.

Dividends:

LLY-PFE-DIVS

Financials: Lilly’ metrics outshine Pfizer’s, and also its Big Pharma peers.

LLY-PFE-ROE

Options: The put and call options trades listed in this article expire in April for LLY, and March for PFE.

Covered Calls: Although Lilly and Pfizer’s don’t have high option yields when compared to other stocks we’ve covered recently, such as CAT or CMI, both of the options trading strategies listed here give you a chance to significantly improve upon these stocks’ dividend yields over this 4-5 month period.

(You can find more details on these and more than 30 high yield covered calls in our Covered Calls Table.)

LLY-PFE-CALLS

Cash Secured Puts: LLY’s put options offer more yield than PFE’s. Since PFE and LLY have made 17% to 20%-plus gains year-to-date, selling cash secured puts below the current stock prices might be the most conservative approach you could take in potentially accumulating shares. (Note: Put sellers don’t receive dividends.)

(There are more details on these and over 30 high yield options trades in our Cash Secured Puts Table.)

LLY-PFE-PUTS

EPS/Valuations: Due to issues with patent expirations, the future sales forecasts are sub-par for LLY and nearly flat for PFE. As we mentioned earlier though, there’s a trade-off between growth and defense in these stocks.

LLY-PFE-EPS

Disclosure: Author has no positions in LLY or PFE at the time of publication.

Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.

3 Solid Industrial Dividend Stocks With High Options Yields

Posted on December 9, 2011

By Robert Hauver

In last week’s article, we showed that the Industrial sector has the 2nd best record for beating & meeting 3rd quarter earnings estimates. It also has the 2nd highest EPS growth estimate for the next fiscal year, trailing only Tech. This week we searched for additional attractive dividend paying stocks in the Industrials sector, focusing on finding the best stocks to buy for growth, valuation, financial metrics, and high options yields:

ETN-ITW-TYC-DIVS

Covered Calls: Although these aren’t high dividend stocks, you can easily earn a much higher overall yield from them, by combining their dividends with high call options yields.

These call options pay up to 11 times more than the dividends during these 4-5 month trades.

The Static Yield refers to the combination of the call option and dividend yields, which represents your total income if the underlying stock isn’t If the stock doesn’t rise above the call strike price at or near expiration. The Total Potential Yield includes the potential price gain that you’ll realize if the stock’s price does rise above the call strike price. For example, for ETN, you’d receive an additional $1.07/share, if the stock rises above $45.oo and gets assigned/sold away from you at expiration.

(You can see more details on these and more than 30 other high yield covered call trades in our Covered Calls Table.)

ETN-ITW-CALLS

Cash Secured Puts: This is a more conservative approach to take: Sell cash secured puts at a strike price below the stock’s current price, so you achieve an even lower break-even price.

As an example, selling ITW $45.00 March put options gives you a $42.20 break-even, which is approx. only 8% above ITW’s 52-week low, as opposed to being over 18% above its low, where it was at the time of publication.

Of course, there’s no guarantee that the stock won’t ge lower than your break-even price, but using this put strategy will decrease your risk more than if you’d just bought the stock outright. As with the call options, there’s a big payoff disparity between the quarterly dividends and the options in these put trades, with put option premiums that are as high as 12 times the dividends.

(You can find more details on these and over 30 other high yield options trades in our Cash Secured Puts Table.)

ETN-ITW-PUTS

EPS: The EPS growth for the most recent fiscal year, quarter, and next fiscal year looks solid for all of these stocks:

ETN-ITW-EPS

Valuations: All of these firms have low Price/Sales and Next Year PEG’s that are right around the undervalued threshold of 1.00.:

ETN-ITW-PEG

Financials: These firms’ all have low debt loads, and their mgt. ratios are generally in line or better than their peers.

ETN-ITW-ROE

Technical Data: As their Relative Strength is in the low 50′s, all 3 stocks are in the neutral, “not oversold/not overbought” region.:

ETN-ITW-BETA

Company Profiles:

Eaton (ETN): Founded in 1911, Eaton is a global technology leader in electrical components and systems for power quality, distribution and control; hydraulics components, systems and services for industrial and mobile equipment; aerospace fuels, hydraulics and pneumatic systems for commercial and military use; plus truck and auto drive-train and power-train systems for performance, fuel economy and safety. Eaton has approx. 73,000 employees and sells products in over 150 countries.

Illinois Tool Works (ITW): Another multibillion dollar firm with nearly 100 years of history, ITW designs and manufactures fasteners and components, equipment and consumable systems and a large array of specialty products and equipment for its worldwide customer base. ITW owns more than 840 small businesses, which are decentralized, and operate in various markets, such as: industrial packaging, power systems/electronics, food equipment, and construction products, among many others.

Tyco Int’l (TYC): Tyco is a leading provider of security products and services, fire protection and detection products and services, and industrial valves and controls. Tyco had 2011 revenue of more than $17 billion and has more than 100,000 employees worldwide. Tyco owns the dominant US residential security firm, ADT.

Disclosure: Author has no positions in ETN, ITW, or TYC at the time of publication.

Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.

2 Easy Ways To Earn 20% On Industrial Dividend Stocks

Posted on December 2, 2011

By Robert Hauver

Although Industrials are down approx. -4% year-to-date, this sector may hold some of the best stocks to buy moving forward. Standard & Poor’s ranks Industrials as #2 in projected EPS growth for 2012, right behind Tech, which gives it the 3rd lowest PEG ratio for 2012:

S&P-EPS-Q3

(Data source: Standard & Poors)

Thus far, 86% of S&P 500 Industrials have beaten or met their Q3 2011 Earnings Estimates, 2nd only to Tech.

S&P-EPS-BEAT-Q3-'11

(Data source: Standard & Poors)

Although this sector looks attractive, finding undervalued high dividend stocks here with strong metrics is still a challenge. A different approach would be to look for a lower-yelding dividend paying stocks, that have stronger growth and financials, and then utilize options to ramp up the dividend yields on these dividend stocks. Both Caterpillar and Cummins have less-than-avg. dividend yields, but you can greatly improve upon their dividends by selling options.

CAT-CMI-DIVS

Covered Calls: Take a look at the big difference between these high option yields and the dividend yields during these 6-7 month trades.

CAT’s call options pay over 9 times their dividends, while CMI’s pay over 15 times.

(The call and put options listed in this article for CAT expire in May, and those for CMI expire in June.)

(You can find more details on this and more than 30 other high yield covered call trades in our Covered Calls Table.)

CAT-CMI-CALLS

Cash Secured Puts: Another proven tactic is selling cash secured puts below the stock’s current share price, in order to achieve an even lower break-even price. The put trade listed here for CMI has a break-even only 3% above CMI’s 52-week low. These put options pay 9 to 16 times more than the dividends in these trades.

Your broker will secure a cash reserve in your account, equal to however many put contracts you sell, times the strike price of the put you sell. This amount is released once the puts expire or the trade is closed. Hence the term, cash secured puts. You’ll get paid for any puts and calls that you sell within 3 days of the trade, often even the same day. Note: put sellers don’t receive dividends, but call sellers do.

The best time to sell cash secured puts is normally when the stock is at the lower part of its range, which will give you an even lower break-even. Both CAT and CMI are higher-beta stocks, which fluctuate widely with the market, so check out their put prices during the next pullback. If you need to be even more conservative, you could also sell cash secured puts at a strike price further below the current share price. This will give you a lower premium, but a lower break-even also.

(You can see more details on these and over 30 other high yield options trades in our Cash Secured Puts Table.)

CAT-CMI-PUTS

EPS/Sales Growth: Both CAT and CMI had strong EPS growth in their most recent fiscal years, and also strong sales and EPS growth in their most recent quarter:

CAT-CMI-EPS

Valuations: CAT’s PEG for its next fiscal year is very low, while CMI’s is consistent with the sector’s .87 PEG. CAT’s Price/Book and Price/Sales are consistent with its industry, while CMI’s Price/Book is a bit higher than its industry avg. of 2.58, but its Price/Sales is lower than the avg. of 1.30

CAT-CMI-PEG

Financials: Although CAT carries a heavier debt load, its interest coverage ratio is 5.9x.

CAT-CMI-ROE

Disclosure: Author is short puts on CAT and CMI.

Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.

The Best Defensive Dow Dividend Stocks To Buy

Posted on November 25, 2011

By Robert Hauver

In spite of over 75% of S&P 500 firms beating or meeting earnings expectations, the Eurozone debt crisis, a slow US economic recovery & the continuing DC stalemate on economic issues, plus slower growth in China are combining to scare investors into a “risk off” position in November. The market has pulled back -9.59% this month, nearly as much as the Sept. selloff, as each of the last 5 months have alternated between rallies and pullbacks.

If you’re an income investor looking for which Dow dividend stocks have been the best stocks to buy in recent months for income and defense, these 3 dividend stocks have all sold off less during these 2011 pullbacks, and have also participated nicely in the rallies. (The only exception is HD’s pullback during the July rally.) They’ve also declined even less in this most recent pullback, (Oct. 28 through Nov. 23, 2011), than in the previous Sept. pullback.

HD-KFT-MCD-PERF

Valuations: HD appears to be the most undervalued stock, on a recent and future EPS growth basis. This seems logical, as HD suffered mightily during the downturn, and homeowners still have to fix their homes eventually. HD’s Price/book is higher that the Home Improvement industry avg. of 2.24, but HD’s very low .83 Price/Sales ratio is in line with industry avgs.

HD-KFT-MCD-PEG

High Options Yields can lower your risk and pump up your dividend yields: Although they’re defensive stocks, MCD and HD have options yields which can help you to turn them into virtual, short-term high dividend stocks.

Covered Calls: If you want to buy these defensive dividend stocks, but gain some downside protection, in the form of a quick “rebate”, selling covered call options is one way to go. In these 2 call option selling trades, you’ll get paid over 6 times the dividend amount now, when you sell call options against the underlying shares.

Selling covered calls allows you to realize some of the stock’s upside potential immediately, and turn a 3% annualized dividend yield into a 15% – to – 23%-plus overall yield. The rub is that you’re committing to sell the stock at the option strike price, even if the stock rises far beyond that price by the Feb. or March expiration date. But if you think the stock and the market will stagnate or swing back and forth during that time period, selling covered calls is a proven way of hedging your bet.

(These call options expire in March for MCD, and expire in Feb. for HD.)

(You can see more details on this and over 30 other high yield covered call trades in our Covered Calls Table.)

HD-MCD-CALLS

Cash Secured Puts: If the recent monthly market reverses have your head spinning , and you want to be more conservative, another strategy is to sell cash secured puts at a strike price below a stock’s current price. This usually offers you an even lower break-even price, which lowers your risk even more, and improves your cash flow, since you’ll get paid put option premiums within 3 days of the trade, (often the same day), instead of waiting for quarterly dividends. (Unlike covered call sellers, put sellers don’t collect dividends.)

Your broker will hold in reserve an amount equal to the value of the strike price times 100, for every put contract that you sell, until the contract expires, or the position is closed out. Each options contract corresponds to 100 shares of the underlying stock.

These put options pay approx. 7 to 8 times more than the stocks’ dividends during this 3-4 month period.

The put options below also expire in March for MCD, and expire in Feb. for HD.

(You can find more details on this and over 30 other high yield options trades in our Cash Secured Puts Table.)

HD-MCD-PUTS

Financials: KFT’s Mgt. efficiency ratios are the weakest in the group, and are also below their peer group avgs, while MCD and HD both have above/avg. ROE and ROI for their peer industries.

HD-KFT-MCD-ROE

Technical Data: As usual with defensive stocks, these equities all have low beta’s. MCD and HD are still over 30% above their 52-week lows, but selling the put options listed above would give you a break-even that’s only 19% above MCD’s low, and 21% above HD’s low:

HD-KFT-MCD-BETA

Disclosure: No positions at this time.

Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.

How To Turn Dividend Aristocrats Into High Dividend Stocks

Posted on November 16, 2011

By Robert Hauver

The Dividend Aristocrats are thought by many dividend investors to be the best stocks to buy for dependable dividends. This makes sense, since these dividend stocks have raised their dividends every year for the past 25 years. However, even with investors scrambling for low risk yield, some of these dependable dividend paying stocks are out of favor in the market, and appear undervalued:

Dividends:

ADM-WAG-DIVS

ADM-WAG-PEG

Valuations: ADM and WAG both have low PEG’s for next year and the next 5 years. They also have very low Price/Sales and Price/Book ratios. WAG has been discounted by the market this year, as a result of its ongoing negotiation with Express Scripts, over pay rates for prescription drugs. If WAG drops the Express Scripts deal, (approx. up to 5% of revenue), they estimate it’ll take off $.21/share from its 2012 earnings, which will put WAG’s projected 2012 earnings about flat with 2011.

Options: Although ADM and WAG aren’t high dividend stocks, you can easily earn a high yield on them, via selling options.

(These put and call option trades all expire in March for ADM, and April for WAG.)

Covered Calls: These 2 trades have call option premiums that will pay you 9 to 12 times the amount of the dividends during the 4-5 month terms. (See the highlighted areas in the tables below.)

Other bonuses: You’ll get paid your option premiums within 3 days of the trade, (often the same day), and you’ll lower your risk via having a lower break-even price.

(You can see more details on this and over 30 other high yield covered call trades in our Covered Calls Table.)

ADM-WAG-CALLS

Cash Secured Puts: If you’re wary of this current market, and you’d like to be even more conservative, another strategy is to sell cash secured puts at a strike price near or below the stock’s current share price. You can often achieve an even lower break-even price, as seen below with WAG, and lower your risk even more. Selling cash secured put options is a strategy via which you get “paid now to wait”. However, unlike covered call sellers, put sellers don’t collect dividends.

The put options below pay approx. 11 to 13 times more than the dividends during this 6-7 month period.

(You can find more details on this and over 30 other high yield options trades in our Cash Secured Puts Table.)

ADM-WAG-PUTS

Earnings: Although WAG and ADM aren’t growth stocks, they both had strong EPS growth quarter-over-quarter, and are projected to grow at steady rates during their next fiscal year:

ADM-WAG-EPS

Financials: ADM just announced this week that it will build a 265 million liter (70 million gallon) biodiesel plant in Alberta, Canada, which will increase ADM’s North American biodiesel production capacity by 50%. Biodiesel produced at ADM’s facility in Lloydminster will help fulfill Canada’s renewable diesel mandate. (Since July 1, 2011, all diesel fuel and heating oil sold in Canada must contain at least 2 percent biodiesel.)

ADM, as the 2nd largest ethanol producer, has had its ethanol margins squeezed by ongoing rising corn prices, hence the lower than avg. operating margin seen below:

ADM-WAG-ROE

Disclosure: No positions at this time

Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.

2 Easy Ways To Triple Your Yields On Dow Dividend Stocks

Posted on November 11, 2011

By Robert Hauver

Do you think that Dow dividend stocks are the best stocks to buy now for dividends and safety? You’re not alone – the Dow has beaten these other major indexes year to date, and also in November, as of 11/10/11:

Although it trails the NASDAQ and the RUSSELL 2000 small caps, the Dow is also nearly even with the S&P 500 since the start of the March 2009 rally.

We found 2 Dow dividend stocks with good metrics and low beta’s, which are therefore less volatile than the market, but which also offer attractive dividends. Coca Cola Co. is also one of the Dividend Aristocrats, a group of dependable dividend paying stocks that have increased their dividends every year for the past 25 years:

CVX-KO-DIVS

You could also more than double your dividends on these stocks, via selling Covered Calls and Cash Secured Puts. (The call and put option trades listed below for CVX expire in June, and those for KO expire in May.)

Covered Calls: One of the big pluses of selling covered call options is that the call option premiums you sell are often more than 2 to 3 times the amount of the dividends during the term of the trade. (See the highlighted areas in the tables below.)

Two other bonuses: You’ll get paid your option premiums within 3 days of the trade, if not the same day, and, you’ll lower your risk by virtue of having a lower break-even price.

(You’ll find more details on this and over 30 other high yield covered call trades in our Covered Calls Table.)

cvx-ko-calls

Cash Secured Puts: If you want to be even more conservative, and achieve an even lower break-even price, selling cash secured put options below the stock’s current price is an options strategy via which you get “paid now to wait”. Unlike covered call sellers however, put sellers don’t collect dividends.

The put options below pay approx. 4 to 4.5 times more than the dividends during this 6-7 month period.

(There are more details on this and over 30 other high yield options trades in our Cash Secured Puts Table.)

CVX-KO-PUTS

Financials: For the most part, CVX and KO have better metrics than the DOW 30 averages, and both firms also have better metrics than their industry peers.:

CVX-KO-ROE

Valuations/Earnings: Although these monolithic firms certainly wouldn’t be considered growth stocks, they both had strong growth in their most recent fiscal years, and quarter over quarter. Analysts are currently predicting that CVX won’t be able to increase their earnings in their next fiscal year, but they may be wrong, given the volatility of oil prices that have arisen from the socio-political dramas of the Arab Spring, and many other oil-producing parts of the world. Coke has also managed to grow its earnings better than its beverage industry peers.

CVX-KO-PEG

Disclosure: Author is long shares of CVX.

Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.

3 Defensive Dividend Stocks That Also Rallied In October 2011

Posted on November 1, 2011

By Robert Hauver

With the turbulent market spinning between rallies and corrections in 2011, are you looking for defensive dividend paying stocks that also have upside rally performance? The 3 Utilities dividend stocks in this article were some of the best stocks to buy in 2011 so far, since they’ve all beaten the S&P year to date, during the recent correction, and have also gained in price during the October 2011 rally:

ED-DUK-WGL-PERF

All 3 of these dividend stocks pay quarterly dividends and are listed in our High Dividend Stocks by Sector Tables.

DUK-ED-WGL-DIVS

Only Duke Energy has somewhat high options yields, and is listed in both our Covered Calls Table and our Cash Secured Puts Table.

Company Profiles:

WGL Holdings: WGL is a public utility holding firm that serves the D.C. metropolitan region.
Washington Gas, its leading subsidiary, has provided natural gas service to customers in the D.C. area for over 160 years and currently serves over one million customers in DC, Maryland and Virginia. WGL’s unregulated subsidiaries provide energy-related services to residential and commercial customers, including government organizations.

Con Edison: For over 180 years, Con Ed has served the metropolitan New York marketplace. Its principal business segments are: regulated electric, gas and steam utility activities, competitive energy businesses. Con Edison of New York provides electric service to approximately 3.3 million customers and gas service to approximately 1.1 million customers in New York City and Westchester County, and also provides steam service in parts of Manhattan. The O&R division provides electric service to 301,000 customers in southeastern New York and adjacent areas of northern New Jersey and eastern Pennsylvania and gas service to 130,000 customers in southeastern New York and adjacent areas of eastern Pennsylvania.

Con Ed is a member of the S&P Dividend Aristocrats, having increased its dividends every year over the past consecutive 25 years.

Duke Energy: Duke is one of the biggest electric power companies in the US, supplying and delivering energy to approx. 4 million U.S. customers. Duke has approx. 35,000 megawatts of electric generating capacity in the Carolinas and the Midwest, and natural gas distribution services in Ohio and Kentucky. Duke’s commercial and international businesses own and operate diverse power generation assets in North America and Latin America, including a portfolio of renewable energy assets. Headquartered in Charlotte, N.C., Duke Energy is a Fortune 500 company.

Financials:

Valuations/Earnings:

Con Ed just reported Q3 2011 EPS of $1.31, vs. $1.24 for Q3 2010, and 9 months’ EPS of $2.94 vs. $2.69 during the same period in 2010.

Duke just reported Q3 2011 adjusted diluted earnings per share (EPS) of $.50, vs. $.51 for Q3 2010, and also increased its full year guidance to $1.40 – $1.45/share, from $1.35 – $1.40.

All 3 firms have valuations below the broad utility sector avgs:

Disclosure: Author owns no shares of WGL, ED, or DUK as of 11/3/11.
This article is written for informational purposes only and author will not be held responsible for
errors or omissions or losses sustained by third parties as a result of acting upon information herein.

Two High Yield Strategies For Hedging Dow Dividend Stocks

Posted on October 28, 2011

By Robert Hauver

As of Oct. 27th, the S&P has come back 17% since its nadir of 1099.23 on Oct. 3rd, leaving some investors nervous about how long the current rally can last. If you’d like to participate in the rally AND have some protection, selling covered calls and/or cash secured put options may interest you.

The key is to use these strategies with dividend stocks that you’re comfortable owning. In our 2 examples, we’ll use Caterpillar, (CAT), which has been one of the best stocks to buy in this current rally, since it’s up more than any other Dow dividend stocks over the past trading month.

Selling Covered Calls to hedge your gains: (You’ll find more details on this and over 30 other high yield covered call trades in our Covered Calls Table.)

If you’d had the prescience to buy CAT on Oct. 3rd, when it began to rise from its year-to-date low of $70.55, all the way to $96.33, (up 36.5% through Oct. 27th), you could hedge over a third of your gain by selling covered call options. Here’s how it works:

(By selling covered calls, you’re committing to sell the underlying shares at whatever strike price you sell the call option at. Each option contract corresponds to 100 shares of the underlying stock, so we’ll use 100 shares of CAT to keep this example clear.)

1. Underlying stock cost/share: $70.55

2. 10/27/11 closing cost/share: $96.33

3. Find the Options Chain for CAT, and click open the May 2012 options. There are call options at a strike price of $97.50, which are selling for $9.55, roughly 37% of the Oct. gains that CAT has made. The idea here is to sell call options above the current strike price, which are “out of the money”. This allows you additional potential price gains if the shares get assigned/sold:

CAT-SWB-CALLS

4. You’d “sell to open”, one $97.50 call option contract for each 100 shares of CAT that you own. This obligates you to potentially have to sell your shares of CAT at $97.50 up until the expiration date of May 19, 2012. (US options expire on the 3rd Friday of the month, and are usually deemed expired or assigned during the next 2 days, Saturday or Sunday, by your broker.) In this example, you’d receive $955.00 for each contract you sell. This money is normally credited to your account by online brokers the same day, or within 3 business days of the trade at the latest. You get paid right away, instead of waiting for the quarterly dividend.

Your breakeven is $60.08, your initial cost of $70.55/share, minus the call option sale of $9.55/share, and minus the $.92/share in dividends you’ll qualify for prior to expiration.

Notice how the call bid premium, $9.55, is over 10 times the dividend of $.92?

CAT-CALLS

Outcome Scenarios For Covered Calls:

1. CAT doesn’t rise above $97.50 – The $97.50 call options expire worthless, leaving you with your $955.00 option annualized static yield of 24.46%, plus the 2 quarterly dividends totaling $92.00/100 shares, and you still own your shares.

2. CAT rises above $97.5o, enough for your shares to be assigned/sold away from you at $97.50/share. In addition to the call option sale money of $9.55/share, your profit also includes $26.95/share, (the difference between the $97.50 and your $70.55 cost), and the 2 quarterly dividends, for a total annualized assigned yield of 95.84%.

Please note: this is an extremely high annualized assigned yield, because of the big price gain involved. If you’d bought CAT at $96.33 on 10/27/11, and it was assigned/sold at expiration in May, your total assigned yield would be 21.96%, which is still very attractive.

In scenario #2, it depends upon whether or not there are any call option buyers who paid a price that’s lower than the difference between the $97.50 strike price you sold the calls at, and CAT’s price near or at expiration. If it’s advantageous, these call buyers would exercise the call option to buy your shares at $97.50. (In general, option buyers tend to exercise call options to buy a stock as it gets closer to the expiration date.)

3. CAT rises above $97.50, but not enough for your shares to get assigned/sold away from you. In this scenario, it depends upon whether or not there are any call option buyers who paid a price that’s lower than the difference between the $97.50 strike price you sold the calls at, and CAT’s price near or at expiration. The outcome is the same as scenario #1.

Selling Cash Secured Puts: (There are more details on this and over 30 other high yielding cash secured put trades in our Cash Secured Puts Table.)

Suppose you missed the big October move for CAT, and you still want to own it, but you don’t want to pay the current price. Selling cash secured puts at a strike price below the stock’s current price offers you a lower break-even price than the current stock price, and immediate income. However, unlike selling covered calls, you don’t collect any dividends. We’ll use the same May 2012 expiration month for this put option example.

Since CAT closed at $96.33, let’s sell one $95.00 put option, just “out of the money”. This obligates you to potentially have to buy 100 shares of CAT at $95.00/share near or on the expiration date of May 19, 2012. Your broker will reserve/hold $9,500.00 in your account when you sell this $95.00 put, which is the “cash reserved” part of the equation.

As with the call options, these puts pay over 10 times what the dividends pay: $10.15 vs. $.92.

1. You’d “sell to open” 1 put option contract for every 100 shares of CAT that you want to own. You receive $10.15/share, or a total of $1015.00 for each option contract sold. Your breakeven is $84.85, which equals the $95.00 strike price, minus the put price of $10.15 that you sold for.

CAT-PUTS

Potential Outcome Scenarios For Selling Cash Secured Puts:

1. CAT doesn’t fall below $95.00 – The $95.00 put options expire worthless, leaving you with your $1015.00 profit, a 19.31% annualized yield. Your broker releases the $9,500.00 cash reserves in your account.

2. CAT falls below $95.00, but is still above your breakeven – If CAT only falls $5.00, for example, to $90.00, you still may be assigned/sold the 100 shares at $90.00, if it’s advantageous for a put buyer to exercise his put option.

However, since your $84.85 breakeven price is still lower than CAT’s $90.00 price, you could sell these 100 assigned shares and still turn a $5.15/share profit, although it’d be a smaller one than your initial put profit. Or, you might choose to hold the shares for future price appreciation and dividend income.

3. CAT falls below your breakeven – You can “retreat” from an underwater sold put position at any time before expiration, by “buying to close” the sold puts, which closes out the position, and “selling to open” a new put position, at a lower strike price, and/or at a different expiration month. Generally, the further out in time you sell options, the higher the premiums are, so there’s a chance of recouping a loss by selling longer-dated options. A good idea is to keep a spreadsheet with your breakeven price vs. the current price of the stock, to monitor your position. This spread will be different than the price you sold the option for and the option’s current price.

Disclosure: Author is short puts of CAT.

Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.