It doesn’t happen often when a CC position is profitable on the stock, option premiums and dividends. Our position in CVS is currently positive with all three. Early on the stock dropped (blue line) so we were losing money on the stock and making money on the options (red line). Recently the stock has run up. In the table at the bottom you can see our option rolls as the stock increased in value. Our rolling could have been more aggressive (higher strikes) as the option profits have declined as the stock pushed higher. We remain bullish on CVS and like the dividend. Plans are to continue rolling the options and hold the stock. On Mar 15 we purchased 300 shares and sold 3 Apr 23 $74 Calls to start the position.
On April 6 we established a CC on PBR when we bought the stock for $8.43 and Sold Apr 16 $8.50 Call for $.17.When we set up CC we were planning to collect the $.29 dividend (ex date Apr 15).
The stock dropped in value after we established the position (blue line in graph). Our $8.50 Call option expired and we wrote Apr 23 $8 Call which we rolled up and out to Jun 4 $8.50 as the stock price recovered.
The $145 in dividends we collected have made this position profitable (black line). Without the dividend we would be losing money. Dividends can make the difference between a winning or losing short term trade. We like the yield on PBR and plan on continuing to roll the options and hold the stock.
With CC’s the profit can come from the short option, stock appreciation up to strike price or from the dividend.
On March 24 we established a Covered Call on NUE. The objective of the trade was to capture a dividend of $.405 (ex-div on March 30). We purchased 500 shares of the stock @$69.17 and wrote 5 “in the money” Apr 1 $67 Call options for a premium. of $2.64 per share . The call option premium provided 3.8% protection against a potential decline in stock value before we could collect the dividend.
The graph shows what happened after the CC was established. NUE stock had a run up in price (blue line) and closed yesterday at $78.75. At the close we were generating profits of $4,790 on the stock and a loss of $3,331 (red line) on the options.
The owner of the calls elected to call the shares away last night so they could collect the $.405 dividend. We sold the shares at $67 resulting in a loss of $1,,085 on the stock. Our short options became $0 and generated a profit of $1,394 resulting in net position profit of $240. Graphs shows the impact of the assignment with stock losing, option gaining and a small net profit.
$240 is not a lot of money in an account of any size…..but with market dynamics and volatility so hard to predict it was a reasonably “safe” trade that generated an annal return of 44%. They key is stringing a series of these “dividend capture” trades together on a weekly basis. In this situation the return on our investment was higher with the shares getting called away but the after tax gain would likely be higher collecting the dividend (taxed at a lower % than the gain on stock/option). We have five similar trades in play this week. My concern with the strategy is having one of the stocks experience a big decline that would offset the benefit of many smaller gains. If the strategy works over time we can easily scale the size of the trades to generate higher $ returns. If the stock falls below the short strike price we have an option of continuing to sell calls against the stock or selling the stock.
ABT had a very bullish article come out on Seeking Alpha (much better than I could write about the stock – look it up if you are interested). I have held shares in the company for over 30 years. The information below depicts my current position. Shares were purchased May 26, 2020. The tracking tool was updated in January and the history was lost so the data starts Jan 24. I have been writing weekly calls against the stock. Combination of stock, options and dividend are generating a profit of $28,686 for an annualized return of 23%. Not a “high flyer” but a solid medical device company with a long history of success.
The red line in the graph shows the profit/loss from the options. In the last month I started writing bullish put spreads along with the covered call. The goal is to generate more option premium. If the stock drops below the short put price I am okay with getting assigned more shares as I am bullish on the stock long term. Since adding short puts to the strategy I have reduced the losses on the options. Usually when the blue line (stock profit) goes up the red line goes in the opposite direction and offset some of the gain. The blue line has increased in the past couple of weeks but the red line held ….resulting in more profit. I sold another put spread this morning that isn’t reflected in the data yet.
Information below summarizes how our CC Strategy on LNC is performing after 267 days. We are generating profit of $23,009 (including $2,040 in dividends). The graph tracks the daily profit/loss for the stock and options over time. We started using a new tracking system in January so it does not have all for the history. From the graph it is clear we have left money on the table by writing call options that were too conservative (either “at the money” or slightly “in the money”). The stock profit (blue line) and option loss (red line) are basically offsetting leaving us with a net profit that has been flat since Feb 7. If we believe LNC will continue to perform well we should be more aggressive and sell out of the money options (which reduce our downside protection) or add out of the money bull put spreads.
The position has returned 32% or 43% annualized……but it could be doing much better if we had adjusted our approach.
From a taxable viewpoint the options have generated short term losses of $33,911 some of which we used in 2020 taxes. Holding the stock until 6/25/2021 will allow us to pay long term capital gains on the $54,880 gain.
This morning we initiated a new CC in RTX. Purchased 1000 shares and sold 10 Feb 26 $74.50 Call options. Net price was $72.33. In addition to capturing the call premium we are looking to capture the dividend of $.475 that goes ex-div 2/25. Stock is up $.93 since we bought the position. Max profit if the stock reaches and stays above $74.50 is $2.17 ($74.50 strike price – net price of $72.33) + dividend ($.475) = $2.645 (3.7% in 7 days). Our break even is $72.33 (net price) – $.475 (dividend) = $71.855. Our intent is to capture the dividend and exit the position next Friday.
We closed our covered call on CFG today. When we opened the position on 1/26 our goal was to capture the $.39 x 500 shares dividend ( x-div on 2/20). We made a small profit on the covered call ($140). We pick up an additional $195 in profit when the dividend is paid for a total profit of $335. Our investment for the covered call was $19,600 (Cost of stock minus option premium received). ROI was 1.7% in 13 days or 47.8% annualized.
The graph below shows the daily profitability of the position. Share prices fell immediately after we established the position. As the stock recovered the net daily profit of the covered call (yellow line) improved. We started making money on the covered call on Feb.5.
We closed the position down to decrease our margin in the account. On Friday we “rolled up” a lot of stock which increased the margin to an uncomfortable level.
We established a new CC on IBM today purchasing 200 shares at $119.65 and selling 2 Feb 19 $120 Calls for $1.53. Net price was $118.12 (stock price – option premium received).
IBM has a $1.63 dividend coming up (ex-div on Feb 9).
If IBM stays above $120 our potential profit is $3.41 (difference between net price and strike price ($1.78) + plus the dividend ($1.63)) or 2.9% in 15 days). We are not planning on holding the shares for the long term….just looking to capture the dividend and some premium over the next two weeks.
Established new CC on DHI. Bought 200 shares @$77.68 and sold 2 “in the money” Feb 19 $75 Calls for $3.94. Net price $73.74. If stock stays above $75 potential profit of $1.26 on the position + $.20 dividend (ex div 2/16) = 1.9% in 17 days, 43% annualized. Almost $4 of downside protection on the position.
We initiated a new covered call position on KBH (home builder). We purchased 300 shares @$42.52 and sold Feb 19 $43 Call options for $2.025. This is the first time we have done a covered call with a real estate developer/builder. Recent financial results were excellent. Stock goes xdiv of Feb 3 with a $.60 dividend.
Picked up the idea from CoveredCallAdvisor.com. Had success following some of their ideas previously. They were more conservative and sold a deeper in the money call. My goal is to pick up the dividend and continuing writing call options against the stock for a few months.