Thanks Dan, Some times this can help. Let’s say the stock has been trending pretty strong but “may” be due for a pause or pullback, but, could still run. You have “some” bias but, ah, well, not conviction… Based on the the bias, split the call option.
Do 5 ITM and 5 @TM. or 5 @TM and 5 OTM.
Completely agree with you, hawk. It’s not an AON proposition (all or none). If you own 1000 shares. You can sell 5 calls and leave the remaining 500 shares uncovered…or you can use the premium you are making through the sale of the 5 calls to buy additional calls (different stike and month) to increase your long exposure. It completely depends on what your bias is for the stock.
Although I don’t think you explicitly stated it, I think you pretty much implied that the reason these 2 stocks don’t provide much of a call premium is their dividend, and if their dividend is coming due fairly soon,(I guess the dividend and it’s affect on the call premium is discounted by Theta, or which ever one of those crazy Greeks deal with time decay, so the closer the dividend is to coming due, the more the premium on the call is going to take a hit) the stock most always takes a drop commensurate to the dividend that is about ready to be dished out. I believe the dividend is like maybe around a month on these two, so the call option premiums should be taking a hit by now since I believe you said Theta starts having a real effect at about 45 days. (Note I am referring to the affect of Theta in relation to the dividend coming due, not the option itself expiring).
So I am assuming, if you wanted to sell a call on a “yield hog”, the time to do it would be right after the dividend is taken out of the stock?
What I am more interested in knowing, is can you effectively sell puts on “yield hogs” to get in to them. Is there a time in the dividend cycle on a “yield hog” where the premium received for selling the put is going to be theoretically the most generous for selling the put price that should knock the stock down into the put being in the money, but not going much beyond that level? Obviously, other variables affect the “yield hogs” price other than the dividend and it disbursement, so I know I am trying to isolate a factor that in the real world is never going to be isolated. Also, do puts usually get exercised in this case? I would assume that if a “Yield Hog” gets knocked down just marginally below the strike price right after the dividend is taken out of the stock price, and there is no new unfavorable fundamental news, that many (at least smaller) investors would just hold onto the stock and not “put” it to you.
Somehow I get the feeling there is no free lunch here, but it is a strategy I have considered. I was wonder if you, or anyone else has tried to get into “yield hogs” by selling puts, and if so, how do they calculate a reasonable premium in relationship to the dividend premium, and how do they deal with Theta and the dividend cycle.
Thanks for the vid DAN. My brain is a little fuzzy from work today. If one is rolling month to month with the covered calls, and the stock is steady or rising, are you using the profits to purchase more stock so you can sell more call contracts?
Seems like it would be more profitable (and fun) to buy stocks at key buy points, and be patient to let them rise for the capital gains, then sell the calls like you said and get called out so you you can find another candidate at a good buy point for the whole process over again.
Don’t forget the added benefit of dividends. For example, if you own T and sell a covered call after the ex-div date you keep the dividend and the covered call. One of my favorite little bonuses.
Dan watched the video. I have been trading options for a long time and never thought about selling an in the money call with the thought of letting the stock be taken from me and doing the procedure for collecting a nice yearly rate of return. But just a question on figuring rate of return as with your first example of BRCM. To figure the rate of return, should not the $1 premiun be divided by your cost basis–$35, not $34 to get your rate of return. I’m about to retire and this type of option play becomes much more relevant when capital preservation and less risk becomes more relevant.
Jpeden
Thanks Dan, Some times this can help. Let’s say the stock has been trending pretty strong but “may” be due for a pause or pullback, but, could still run. You have “some” bias but, ah, well, not conviction… Based on the the bias, split the call option.
Do 5 ITM and 5 @TM. or 5 @TM and 5 OTM.
Completely agree with you, hawk. It’s not an AON proposition (all or none). If you own 1000 shares. You can sell 5 calls and leave the remaining 500 shares uncovered…or you can use the premium you are making through the sale of the 5 calls to buy additional calls (different stike and month) to increase your long exposure. It completely depends on what your bias is for the stock.
🙂
Dan
Interesting Video, Dan!
NLY/AGNC analysis:
Although I don’t think you explicitly stated it, I think you pretty much implied that the reason these 2 stocks don’t provide much of a call premium is their dividend, and if their dividend is coming due fairly soon,(I guess the dividend and it’s affect on the call premium is discounted by Theta, or which ever one of those crazy Greeks deal with time decay, so the closer the dividend is to coming due, the more the premium on the call is going to take a hit) the stock most always takes a drop commensurate to the dividend that is about ready to be dished out. I believe the dividend is like maybe around a month on these two, so the call option premiums should be taking a hit by now since I believe you said Theta starts having a real effect at about 45 days. (Note I am referring to the affect of Theta in relation to the dividend coming due, not the option itself expiring).
So I am assuming, if you wanted to sell a call on a “yield hog”, the time to do it would be right after the dividend is taken out of the stock?
What I am more interested in knowing, is can you effectively sell puts on “yield hogs” to get in to them. Is there a time in the dividend cycle on a “yield hog” where the premium received for selling the put is going to be theoretically the most generous for selling the put price that should knock the stock down into the put being in the money, but not going much beyond that level? Obviously, other variables affect the “yield hogs” price other than the dividend and it disbursement, so I know I am trying to isolate a factor that in the real world is never going to be isolated. Also, do puts usually get exercised in this case? I would assume that if a “Yield Hog” gets knocked down just marginally below the strike price right after the dividend is taken out of the stock price, and there is no new unfavorable fundamental news, that many (at least smaller) investors would just hold onto the stock and not “put” it to you.
Somehow I get the feeling there is no free lunch here, but it is a strategy I have considered. I was wonder if you, or anyone else has tried to get into “yield hogs” by selling puts, and if so, how do they calculate a reasonable premium in relationship to the dividend premium, and how do they deal with Theta and the dividend cycle.
Any thoughts?
Don
Thanks for the vid DAN. My brain is a little fuzzy from work today. If one is rolling month to month with the covered calls, and the stock is steady or rising, are you using the profits to purchase more stock so you can sell more call contracts?
Seems like it would be more profitable (and fun) to buy stocks at key buy points, and be patient to let them rise for the capital gains, then sell the calls like you said and get called out so you you can find another candidate at a good buy point for the whole process over again.
Don’t forget the added benefit of dividends. For example, if you own T and sell a covered call after the ex-div date you keep the dividend and the covered call. One of my favorite little bonuses.
Dan watched the video. I have been trading options for a long time and never thought about selling an in the money call with the thought of letting the stock be taken from me and doing the procedure for collecting a nice yearly rate of return. But just a question on figuring rate of return as with your first example of BRCM. To figure the rate of return, should not the $1 premiun be divided by your cost basis–$35, not $34 to get your rate of return. I’m about to retire and this type of option play becomes much more relevant when capital preservation and less risk becomes more relevant.
Jpeden
Great video Dan hope it’s stored in your education videos