2 Blue Chip Dividend Stocks Going Ex-Dividend Soon, With High Options Yields

by Robert Hauver
Looking for a safe way to increase your yields?
Our DoubleDividendStocks.com investing service has been specializing in combining options-selling with high dividend stocks since 2009.

Our Covered Calls Table features over 25 covered calls trades, which we update throughout each reading day. Two trades that caught our attention this week are for blue chip dividend stocks Boeing, (BA), and Intel, (INTC).

Both BA and INTC go ex-dividend in early August:  BA goes ex-dividend ~8/9/18, and INTC goes ex-dividend ~8/6/18. They both have conservative payout ratios, but a relatively low dividend yield.

Options:
Although neither one is in the realm of high divided stocks, you can make up for that, via selling covered calls. The August quarterly dividends make for an attractive setup for these covered call plays.
For BA, we chose a $365.00 call strike which is ~3% above its current $354.44 price/share. This call strike pays $5.20, with a tight bid/ask of $5.20/$5.30.
The $5.20 call option payout is ~3X BA’s quarterly $1.71 dividend. It transforms it from a ~7% annualized yield to a ~21% annualized yield, since the trade has just 25 days until it expires.

Here’s a breakdown of the 3 profitable scenarios for the BA trade. Since the $365.00 call strike is $10.56 above BA’s price/share, there’s ample compensation for potentially missing out on the quarterly $1.71 dividend, if the shares rise to $365.00 and get called away prior to the August ex-dividend date. We listed the nominal yields for each scenario:

The INTC trade is right at the money, with a $52.50 call strike, vs. INTC’s $52.30 price/share. The call bid of $1.44 is well over 4X INTC’s $.30 quarterly dividend.

Since both BA and INTC have had very strong price gains in the past year, and are fairly close to their 52-week highs, here’s another strategy to consider.
We’ve added these August put-selling trades to our Cash Secured Puts Table, which has over 30 trades that are updated throughout each trading day.
The August $345.00 BA put strike pays $6.40, which is well over 3X BA’s quarterly dividend, and offers a breakeven of $338.60.
The INTC August $50.00 put pays $.81, which is over 2X INTC’s $.30 quarterly dividend, and has a breakeven of $49.19.
There are plenty of other Put option and Call option strike prices you can choose from. As you get further away, (higher) from the underlying stock’s price/share, the call option bid premiums are lower in value. Conversely, lower put strikes don’t pay as much as those which are closer to the underlying stock’s price/share. One other note – put sellers don’t receive dividends.

Performance:
As we noted above, both BA and INTC have had quite a price run over the past year – BA is up 68.77% and INTC is up 49.38%.

Price Targets:
At their current prices, both BA and ~12% below analysts’ consensus target prices.

Financials:
That bodacious ROE figure for BA isn’t a typo – BA’s management has opted to use more debt than equity in financing its growth over the years. So, its ROE is very high, but its Debt/Equity ratio is also quite high, vs. industry averages.
Like BA, INTC has stronger than average ROA, ROE, and ROI figures, and also has a much better Operating Margin. Its Debt/Equity ratio is higher than industry averages, but not nearly as much as BA’s is.

All tables furnished by DoubleDividendStocks.com, unless otherwise noted.

Disclaimer: This article was written for informational purposes only, and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article.

Disclosure:
Author owns no shares of BA or INTC at present time.
Copyright 2018 RH Group Inc. All Rights Reserved.

Tech Dividend Stocks With High Options Yields

by Robert Hauver
Who are the winners so far in 2017? We looked at sectors from a variety of angles – trailing valuations, future earnings valuations, dividend yield, and performance, to see which sectors have outperformed, and which ones hold the most promise for the future.

Not surprisingly, Tech was a clear winner in Performance- it leads all other sectors so far in 2017:

Click here to read more…

3 Large Cap Tech Dividend Stocks With Double Dividends

By Robert Hauver

Searching for undervalued dividend paying stocks with strong growth?  The Tech sector offers some of the best stocks to buy in 2012 for growth and dependable income. The cash-rich Tech sector gained just 1.03% in 2011, in spite of sector earnings growing by over 18%.  However, Standard & Poors is projecting the Tech sector to achieve the largest 2012 EPS increase, and Tech’s P/E is also currently below its 4-year average:

SP-SECTOR-EPS

(Data Source: Standard & Poors)

3 Large Cap Tech Dividend Paying Stocks – Although Tech isn’t normally known for high dividend stocks, there are now dependable dividend stocks in this sector, including these iconic firms, all of whom sport low dividend payout ratios. Better yet, their dividend growth rate is on the rise – all 3 companies had big dividend increases in 2011-  MSFT: up 25%; INTC: up 16%; IBM: up 15%.

ibm-INTC-MSFT-DIVS

Covered Calls: Want to double or triple your dividends? Selling covered call options is a strategy that allows you to vastly improve upon the dividend yields of a stock. These 3 trades have call options that pay from 3 to 11 times what the dividends pay during their approx. 3-month terms. (All options mentioned in this article expire in April 2012.)  Another bonus is that you receive your option premium $ within 3 days of selling a put or call option. In fact, many brokers, such as Schwab, credit your account the same day.  The covered call strategy also helps you to hedge gains in a stock that you own, as we’ve detailed in previous articles. This strategy is also used for locking in income and/or lowering risk when buying new stocks.

You can find additional details on over 30 high yield Covered Calls trades we’ve discussed in our recent articles in our Covered Calls Table.

IBM-INTC-CALLS

Cash Secured Puts: Selling cash secured puts below or close to a stock’s current price is an alternative strategy to use, if you want to buy shares below the current market price, and have a lower break-even cost.  Your break-even is the difference between the put premium and the put strike price. In the table below, the break-even for MSFT is $23.65, which equals the $27.00 Put Strike Price, minus the $1.10 Put Bid Premium.  As with the call options, these April put options pay many times over what the quarterly dividends pay.

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

IBM-INTC-PUTS

Valuations: MSFT and INTC both currently have P/E’s close to their 5-year low P/E’s.

INTC, however, recently warned that their 4th quarter revenue and earnings will be negatively impacted by the floods in Thailand: “The company now expects fourth-quarter revenue to be $13.7 billion, plus or minus $300 million, lower than the previous expectation of $14.7 billion, plus or minus $500 million. Sales of personal computers are expected to be up sequentially in the fourth quarter. However, the worldwide PC supply chain is reducing inventories and microprocessor purchases as a result of hard disk drive supply shortages. The company expects hard disk drive supply shortages to continue into the first quarter, followed by a rebuilding of microprocessor inventories as supplies of hard disk drives recover during the first half of 2012.” (Source: Intel website)

Will Intel regain these lost sales in the second half of 2012? Even with the supply issues, he current estimate of under 1% 2012 growth for Intel seems very low, especially since Intel has traditionally been very conservative in its earnings projections, and had 4 consecutive quarterly upside earnings surprises in 2011.

IBM’s new CEO, Ginni Romett, has already made a new acquisition, buying cloud software testing firm Green Hat.  IBM also had 4 2011 consecutive earnings surprises, (low single-digits), while Microsoft had 3 much larger ones, (approx. 9% to 19%).

IBM-INTC-PEG

Financials: Although IBM carries the highest debt load, but they earn enough $ to cover their interest payments by 53 times – quite a cash machine, to say the least.

IBM-INTC-ROE

Performance:  IBM and Intel both outperformed the Tech sector in 2011, but MSFT got no respect.  However, MSFT is up the most so far in the first few days of 2012:

IBM-INTC-PERF

Disclosure: Author is long INTC and IBM shares, and short INTC calls at the time of publication.

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

Author: Robert Hauver © 2012 Demar Marketing All Rights Reserved

3 Tech Dividend Stocks Leading The Market

By Robert Hauver

In terms of dividend stocks that are outperforming the market, the Tech sector offers some of the best stocks to buy in 2011 for share performance. Tech has outperformed all other sectors over the last month, and is also among market leaders for the past trading quarter: (Performance through 10/13/11. Month = 21 trading days; Week = 5 trading days; Quarter = 63 trading days)

11

These 3 stocks had the best performance for dividend paying stocks in the Tech sector for the 5 trading days through 10/13/11, and have also outperformed the S&P 500 in the past quarter, month, and year-to-date:

KLAC-LLTC-PERF

The Tech sector may not be renowned as a pocket of high dividend stocks, but Tech firms are quickly realizing the market value of paying dividends.

In fact, this sector has raised its overall dividends by over 35% thus far in 2011, lagging only the Financials and Materials sectors for dividend increases. (The hated Financial sector had the biggest decrease in dividends during the crisis, and has been accelerating its dividends recently, as banks are once again are able and are allowed by the gov’t. to pay dividends):

SP-Q3Divs

Dividends: These 3 firms all have dividend yields far above the Tech sector average, a low dividend payout ratio, and have increased their dividends in 2011:

KLAC-LLTC-INTC-DIVS

High Options Yields: As we’ve noted recently, market turmoil has increased volatility, which continues to raise options prices, much to the benefit of sellers of covered call options and put options.

(The trades listed below are all based on options which expire in Jan. 2012.)

You can find more details on this and over 25 other high yield covered call trades in our Covered Calls Table.

Covered Calls: These call options pay up to nearly 10 times as much as the quarterly dividends over this 3-month period.

KLAC-LLTC-CALLS

Cash Secured Puts: Want to be more conservative?  You can sell cash secured put options at a strike price below the current share price and achieve a lower break-even, in addition to getting paid almost immediately, as opposed to waiting for quarterly dividends. (Online brokers must credit options sales to your account within 3 days after the trade, and they often credit the cash immediately after you make a trade.)  As you can see below, KLAC’s put options pay 10 times their quarterly dividend.

There are more details on this and over 25 other high yielding cash secured put trades in our Cash Secured Puts Table.

KLAC-LLTC-PUTS

Valuations: LLTC looks undervalued on a PEG basis, but its Price/Book is far above the industry avg. of 2.72. LLTC did, however, increase its tangible book value/share from only $.20 in 2009, to $2.20 in 2010. As we’ve noted recently, Intel’s 3.40% growth forecast for its next fiscal year may well be too modest, giving it too high of a near-term PEG:

KLAC-LLTC-PEG

Financials: These firms are all above their industry avgs. for mgt. efficiency ratios and operating margins . KLAC and INTC’s debt loads are also less than industry avgs., while LLTC’s debt/equity ratio is way above its peer avg. of just .24. 

KLAC-LLTC-ROE

Disclosure: Author is long shares and short covered calls of INTC.

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

© 2011 DeMar Marketing. All Rights Reserved.

2 Solid Dow Dividend Stocks With 2 Ways to Earn 20% Yields

By Robert Hauver

Looking for the best stocks to buy in 2011? With the S&P down over 9% year to date, you may be looking for dividend paying stocks that have outperformed the market. In this respect, the Tech sector offers some of the best stocks around, as this sector has beaten all other sectors except Utilities over the last trading quarter. We found 2 well-known, undervalued Dow dividend stocks in the Tech sector with good earnings growth, strong financials, both of which offer high options yields for covered all sellers and cash secured put sellers

One of these stocks, Intel, is listed in our High Dividend Stocks By Sector Tables, since it has a higher dividend yield than average for the Tech sector. Intel increased its quarterly dividends from $.1812 to $.21 for the 3rd quarter of 2011. Microsoft just announced an even bigger dividend increase for the third quarter, rising to $.20 from $.16/share.

INTC-MSFT-DIVS

Selling Options Offers Much Higher Yields:

Even though these aren’t in the upper realm of high dividend yields, by selling options, you can greatly increase your yield to over 20% annualized on these stocks. In these 2 strategies the option yields outstrip the dividend yields by up to over 10 times.

Covered Calls: The INTC call option expires in December, and the MSFT calls expire in Jan. 2012.

The call option premiums for MSFT pay nearly over 9 times that of MSFT’s dividends during this 4-month period, ($1.78/call premium vs. $.20/dividend).

You’ll find more details on this and many other high yielding covered call trades in our Covered Call Table.

INTC-MSFT-CALLS

Cash Secured Puts: If you want to be more conservative, and achieve a lower break-even entry price, you can sell cash secured put options just below the current stock price and receive some rather high option yields. Due to the present market volatility, the difference in put options premiums vs. dividends is even higher than calls vs. dividends.

Again, MSFT offers the most dramatic advantage for selling options vs. dividends:  MSFT pays $2.10 for puts. vs. $.20 for dividends. The puts listed below all expire in Jan. 2012.

There are more details on this and many other cash secured puts trades in our Cash Secured Puts Table.

Note: Dividends in our puts tables only for comparison – unlike covered call sellers, put sellers don’t receive dividends.

INTC-MSFT-PUTS

Financials: In addition to having very low debt loads, (INTC is nearly debt-free), both of these stocks have strong management efficiency and margin metrics.

INTC-MSFT-ROE

Valuations: The 3.39% EPS growth figure for INTC might be too low, given that analysts typically undervalue Intel’s future earnings, as evidenced by INTC’s 4 consecutive earnings surprises over the past year. Thus, Intel’s PEG for the next fiscal year looks high. The Price to Book metrics for both firms are below the 3.91 average for the Tech sector.

INTC-MSFT-PEG

Technical Data: Intel has had a better time of it in 2011 than Microsoft, and has fared well in the correction. MSFT’s Relative Strength of 39.11 puts it just inside oversold territory.

INTC-MSFT-PERF

Disclosure: Author is long shares of Intel.

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

Dogs Of The Dow – Double Your Dividend With Options

By Robert Hauver

We checked the top 5 current Dogs of the Dow, (the current Dow component stocks with the highest dividend yields), to see how their dividends stack up vs. their covered calls and cash secured puts.  Selling covered calls can be an effective way to protect your portfolio in a down market.

The current Dow Dogs are:

DOW-DOGS-6-11-DIV-PERF

As is often the case, Telecoms have the highest dividend yields in the group, with AT&T and Verizon topping the list.  These 2 dividend paying stocks are in the Telecoms section of our High Dividend Stocks By Sector Tables.  Two Healthcare dividend stocks and Tech giant Intel round out the list.  Verizon has the most aggressive dividend payout ratio, and Intel the most conservative.  Performance-wise, only Pfizer has gained much year-to-date, while Intel and Merck have lagged the others over the past year, which, in Intel’s case, belies the strong EPS growth over the recent past:

DOWDOGS-PEG-6-11

All 5 firms posted sequential EPS gains in the most recent quarter, but Pfizer was the laggard.  Analysts don’t currently believe that Intel can improve a great deal next fiscal year, given the outstanding 160% EPS growth it had this past fiscal year, which gives INTC a high 12-month PEG.  AT&T has the lowest 12-month PEG, 1.25, and the two healthcare stocks look very over-valued, when taken on a PEG basis. Looking out further, only Intel has a 5-year PEG under 1. Intel’s 10.12 P/E is also way below the average 16.41 P/E for the semi-conductor industry.

Financial Ratios:

DOWDOGS-ROE-6-11

AT&T and Intel are the clear winners in Mgt. efficiency ratios and margin, while Intel is nearly debt-free.

So, how do the dividends for these stocks compare to their January 2012 options? These call options range up to 3 times the dividend amounts.  Selling a covered call from any of the trades listed below allows you to at least double your dividend, giving you a 10%-plus static yield, and the potential for additional assigned yield gains. You’ll also get some additional downside protection, via a lower break-even point, by selling covered calls.  The catch is that you’ll have limited participation in upside price gains, should any of these dogs start to run. You can find more info on these and other covered call trades in our Covered Call Table.

Covered Calls:

DowDogs-6-11-CALLS

Feeling not so bullish? Selling cash secured put options can give you an even lower break-even point than the calls listed above. The put premiums below range up to 6 times the dividend amounts for this period.  Your net cash outlay will be the cash reserve minus the put premium you receive. Ex.) For AT&T, you’d have a net outlay of $2,778.00, ($3000.00 less $222.00 received for selling one put. Each options contract corresponds to 100 shares of the underlying stock).  You can find more info on these and other covered call trades in our Cash Secured Puts Table.

Cash Secured Puts:

DOwDogs-6-11-PUTS

Disclosure: Author is long AT&T and Intel.

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

3 Undervalued Tech Dividend Stocks With High Options Yields

By Robert Hauver

Are there any undervalued high dividend stocks in the Tech sector? Since this sector has lagged the market in 2011, rising less than 5% thus far, we thought that just might be some overlooked dividend paying stocks that offer some growth potential also.  The Standard & Poors data below also suggests that the Tech sector may have good growth prospects this year, with an overall PEG of just .74.

SP-SECTOR-PEG-

Although Tech stocks don’t generally pay high dividends, and many don’t pay any dividend at all, we did find 3 Tech dividend stocks that appear to be undervalued.  We’ve added these 3 stocks to the Tech section of our High Dividend Stocks by Sector tables:

Comtech Telecommunications, (CMTL): Comtech designs, develops, produces and markets products, systems and services for advanced communications solutions in 3 areas: Telecom transmissions, Mobile data communications,  and RF microwave amplifiers. Their product lines include: satellite earth station modems, cell-tower traffic backhaul gear, broadband video and data transmission systems, and many others.

STMicroelectronics, (STM): One of the world’s largest semiconductor companies with net revenues of US$ 10.35 billion in 2010 and US$ 2.53 billion in Q1 2011, Switzerland-based  STM has particular strengths in Multimedia, Power, Connectivity and Sensing technologies and its sales, including wireless business conducted via ST-Ericsson, the 50/50 Joint Venture with Ericsson, are well balanced among the industry’s major sectors: Telecom (26%), Automotive (17%), Consumer (11%), Computer (14%), Industrial (8%) and Distribution (24%)

Intel, (INTC): A semiconductor chip maker, which develops advanced integrated digital technology products, mainly integrated circuits, for industries such as computing and communications.  In addition to raising its dividend over 30% in the past 6 months, Intel also increased the authorization limit for share repurchases by an additional $10 billion in January, bringing the total outstanding buyback authorization to $14.2 billion.

Selected financial ratios, dividend yields, and profitability figures:

CMTL-STM-ROE

While all 3 firms have a similar dividend yield, giant Intel clearly has superior ROE and Margin figures.

Valuations:

CMTL-STM-PEG

Small cap CMTL has a very low EV/EBITDA valuation, and also a very low long-term PEG ratio, (only .34), due to its 35% projected 5-year EPS growth rate. However, analysts are projecting earnings to decline over the next 12 months.

STM has low PEG’s for the next 12 months and long-term also. Like Intel, STM’s earnings exploded over the past 12 months, growing over 170%. Demand for broadband services is driving the fastest growth ever seen in the mobile communications industry. Mobile network operators are quickly rolling out faster services offering data rates at 14.4Mbit/s and above.  Infonetics Research sees market for LTE infrastructure, which requires several types of basestations, exceeding $11bn by 2014.

INTC has delivered earnings surprises for the past consecutive 4 quarters, and recently beat Q1 2011 estimates by over 21%. 2010 was a record year for them, and they expect 2011 to be more of the same, so their .99 PEG may even be quite conservative.

Here’s how these stocks have performed:

CMTL-STM-PERF

Intel has been surging of late, erasing its earlier losses, while STM has recently given back some of its gains. Looking back for 1 year, CMTL is actually down, while INTC is up less than 9%, and STM is up over 40%.

Covered Calls:

CMTL-STM-CALLS

All 3 firms have high options yields that outstrip their dividend payouts, by at least 3x. These October call options also offer even higher yields, should the shares get assigned. There are more details on these and other Covered Call trades in our  Covered Calls Table.

Cash Secured Puts:

CMTL-STM-PUTS

Selling cash secured put options can also secure you a much higher payout than the dividends during this term, and also give you a lower break-even price.

There are more details on these and other Put Options trades in our Cash Secured Puts Table.

Disclosure: Author is long INTC shares.

Disclaimer: This article is written for informational purposes only.

3 Dow Dividend Stocks With High Options Yields

By Robert Hauver

Looking for blue chip dividend paying stocks with a decent dividend yield? As the rally continues, and share prices climb, many dividend yields aren’t keeping pace, posing an ongoing challenge for income investors.  If you want to earn higher yields over the next few months, here are 3 Dow dividend stocks that all have double-digit high options yields on Covered Calls and Cash Secured Puts:

American Express (AXP). Intel (INTC), and JP Morgan Chase (JPM).

AXP-INTC-JP-ROE-2011-02-17

Not surprisingly, JP Morgan has the weakest mgt. metrics, due to hangover from the financial crisis, but it does have a higher Profit Margin than American Express. However, JPM has appreciated the most year-to-date, up 13.15%.  JPM has also talked about raising its dividend in the future, as conditions approve. Currently, Intel has the best dividend yield of these 3 stocks, and is above the Dow 30 2.71% average.  We’ve added INTC to the Tech section of our High Dividend Stocks by Sector Tables.

Intel’s higher dividend yield hasn’t translated into higher share performance yet in 2011, as it’s up only 4.32%, due to analysts’ concerns over slower growth in 2011, after 2010’s record earnings. Thus far, JPM has the lowest 2011 PEG ratio, but Intel may very well keep surprising to the upside, if Tech spending continues to pick up in 2011:

AXP-INTC-JP-PEG-2011-02-17

You’d think that American Express would be poised to capitalize on rising consumer spending, but pending legislation on credit card fees is holding back EPS growth forecasts. However, the Fed just weighed in on possible fallout from this bill, so, things may change: “The Dodd-Frank Act enacted in July requires the Fed to establish the cap on so-called interchange fees charged to merchants. The central bank proposed in December to set the limit at 12 cents per transaction, setting off a lobbying battle between retailers who favor the rule and lenders, who stand to lose more than $12 billion in annual revenue if the proposal as written becomes final” (Reuters)

Here’s how Covered Calls stack up vs. the dividends for these stocks:

AXP-INTC-JP-CALLS-2011-02-17

As none of these stocks boasts a huge dividend yield, their call options yields easily outstrip their dividends by at least 6 to 1. These are all relatively short-term 4- to 5-month trades, expiring in June and July. There are more details about these and other trades in our Covered Call Table.

For investors looking for a lower entry point, selling Cash Secured Puts also offers double-digit annualized yields:

AXP-INTC-JP-PUTS-2011-02-17

Intel has the least volatility of this group, at under 14 over the past few months, hence its put options yields trail AXP and JPM, both of which have 20-plus volatility. You’ll find more details about these and other options trades in our Cash Secured Puts Table.

Disclosure: Author is short JPM puts, long INTC shares, and short INTC calls.

Disclaimer: This article is written for informational purposes only.

Dow Dividend Stocks – Top 7 Cash Secured Put Options

By Robert Hauver

Dow dividend stocks aren’t usually mentioned in the world of high dividend stocks, but selling cash secured put options is a way you can earn some impressive double-digit annualized yields out of even these modest dividend paying stocks.

We screened for the top 7 put selling yields for DOW dividend stocks and came up with these 7 option trades:

DowPuts9-7-10

(All of the above put bid yields are based upon 100% cash reserve)

As you can see, these put yields far outstrip the dividend yields, and in a shorter 5-6 month time period.  Hence, the annualized yields are pretty impressive.

We’ve added some of these put options this week to our Cash Secured Puts Table, which will show more detail.

Why sell cash secured puts, instead of just buying the stock outright?

  1. More Risk Protection – By earning the higher put option $, you’re lowering your break-even cost, and giving yourself greater downside protection.
  2. Better Cash Flow –  You get paid the put premium within 3 days of selling puts, as opposed to waiting each quarter for a dividend payout.
  3. Higher Yields – This happens 2 ways: In the above trades, the put yields are 2 to 9 times that of the dividend yields.  Also, with your lower breakeven cost, if the shares do get assigned/put to you, the ultimate dividend yield on the underlying shares will be higher, due to its lower cost.
  4. Potential Tax Deferral –  The IRS rules state that,”If a put you write is exercised and you buy the underlying stock, decrease your basis in the stock by the amount you received for the put. Your holding period for the stock begins on the date you buy it, not on the date you wrote the put.” (Source:www.IRS.gov/publications)         This means that you don’t have to pay taxes on the put $ you received until you sell the assigned underlying shares. If you hold the underlying assigned shares for more than 1 year, you’ve also converted a short-term gain into a long-term gain.
  5. Knowing your “trade range” before trading–  This strategy tells you your maximum gain and break-even cost, before you invest, as opposed to buying, and hoping for price appreciation.

Cons

  1. Options gains are always taxed at short-term capital gains rates, which will be higher than qualified dividend tax rates.
  2. Put options sellers are required to have 100% “cash reserve” by their brokers, i.e., your broker will set aside 100% of the value of the underlying shares against which you sell puts. 100% cash reserve is always required in an IRA account, but, investors with thorough options experience may qualify for Options Level 3 trading status, which lets the broker reduce the cash reserve to a lower 25-35% approx. range, thereby employing leverage.  A note of caution here: if you do employ this type of leverage, it’s very important to keep track of your potential exposure, and not get in over your head.
  3. Cash secured put selling is a strategy that requires a bit more of a hands on approach, as opposed to the “buy and hold” strategy. However, this strategy shouldn’t be confused with day trading – Put sellers make their sale, collect the put $, and monitor the put’s value during the investment term, as opposed to jumping in and out of a trade every day.
  4. Less rally participation – The maximum gain on selling cash secured puts is the amount of $ you receive when making the put sale, so, this profit could potentially be less than the eventual price appreciation of a stock.

Is it worth it?

Some investors would argue that, if you do nothing, and the stock’s price declines, you could also own the stock a lower cost.  That could be happen, but looking at the possible outcomes in the market, selling cash secured put options offers a greater chance for income:

PutSellingOutcomes

Another issue to consider here is time value of money, and what you’ll earn on your money, while you wait for a stock to hit your price.

In addition, due to the timing factor in options, time favors an option seller over an option buyer, since the buyer must guess the stock’s ultimate price direction and price level, and must be correct before the option expires.  That’s often a very tall order, and it’s one of the reasons that 3 out of 4 options expire worthless – which is a distinct advantage for an option seller – time is on your side.

Disclosure: Author is short INTC puts.

Disclaimer: This article isn’t intended as investing or accounting advice.

Dow Dividend Stocks – Top 5 Covered Calls

By Robert Hauver

Maybe you want to buy blue chip Dow dividend stocks, but you don’t have much faith in price appreciation, given the market’s performance in 2010 thus far.  Selling covered calls often allows you to lock in a much higher yield than the current dividend yield of most dividend paying stocks.

We screened for the highest at the money covered call trades for the Dow 30, and came up with yields ranging from 8.54% to 10.17% for CAT, GE, BA, MSFT, and INTC. (Full names in table below.)  Pretty nice yields, especially when you consider that the annual yields for these 5 stocks range from just 2.18% to 3.20%.  Given that these option trades are all 6 to 8 month trades, their annualized yields are even higher, as you can see below:

DowCovCalls-9-1-10

(We’ve listed these trades this week in our Covered Calls Table, which gives you more specifics.)

Here’s a Performance table which lists each stock’s Year-to-Date, 2nd Quarter, and 1-Year price performance:

Dow5-Perf.2010thru9-1

This group’s Industrials far outperformed the Techs in a declining market YTD.  The overall Tech sector also lagged Industrials over the past year, with Industrials up 18.3% and Tech up only 9.8%.  Year-to-date, Tech is down -2.9%, and Industrials are up 3.1%.

As most value investors will tell you, lagging sectors can often be a good place to look for bargains.  The 2 Tech firms in this group, Intel, (INTC), and Microsoft, (MSFT) both have PEG ratios below 1, a statistic which is generally recognized as indicating that a stock may be undervalued.

Dow5PEGS-9-1-10

As with any strategy, there are pros and cons you should consider when selling covered calls.

Pros:

  1. Immediate Cash Inflow – Instead of waiting each quarter to collect dividends, when you sell a covered call, you’ll receive the call bid premium money into your account within 3 days from making the sale, often even the same day, depending upon your broker.  Of course, you’ll also keep collecting the dividends on the underlying shares.
  2. Superior Yield – As you can see from the table, these particular call yields are 3 to 4+ times the dividend yields.  This strategy allows you to transform a modest yield into a superior one.
  3. Downside Protection – The call premium $ you receive lowers your break-even cost, giving you more downside protection.
  4. You Know The Trading Range Before Making The Trade – This strategy tells you your exact upside profit potential, and your downside break-even, before you trade, as opposed to buying a stock and trying to determine what your upside potential will be.
  5. The Odds Are With You – It’s been proven that 3 out of 4 options expire worthless. When you’re an option seller, time is on your side, as opposed to the options buyer, who must not only guess the stock’s ultimate direction and approximate price, but must do it before expiration.

Cons:

  1. Limited Rally Participation – Once you sell a covered call, you’re obligated to deliver the underlying shares at your sold call’s strike price if they get assigned, (sold) away from you, no matter how high the stock goes. So, if you think there’s going to be a big rally, then you may not want to sell covered calls.
  2. Higher Entry Costs – You must own 100 shares of the underlying stock for every covered call that you sell.  Therefore, covered call sellers have a greater initial outlay than call options buyers.
  3. Assignment Risk – Selling covered calls against a stock puts you in jeopardy of having your shares sold away from you.  You have to weigh many factors, such as the dividend yield today, and potential dividend growth, and possible price appreciation.  However, if you think that the market is going to be range-bound, or bearish, then the covered call strategy will give you some added downside protection.

Deciding whether or not to sell covered call options comes down to many issues, such as, your risk profile and your market outlook.  If you want to capture some cash yields immediately, and not wait for the market to decide its direction, then this strategy may be right for you.

Disclosure: Author is long shares of INTC, and short INTC calls.

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