17 Dow Stocks and DIA Are Buys
Small and large dividend stock investors can use monthly covered calls to generate steady monthly income from options premiums and options trading.
By Donald E. L. Johnson
Cautious Speculator
DIA and 17 Dow Industrials stocks have 100% buy ratings on Barchart.com.
Implied volatility is low and puts and call options are cheap, which is good for stock options buyers, not for sellers.
Traders can buy DIA and hold or buy one of the stocks rated as buys for swing trades instead of selling low priced covered calls or cash secured puts.
Speculators might buy a call option LEAP on a depressed stock like Goldman Sachs and then sell covered calls on the LEAP.
Traders of covered calls and cash secured puts stock options have a lot of ways to play what may be a bull market despite the Federal Reserve Board’s forecast that it will hike interest rates two more times this year.
Of the Dow Jones Industrials’ 30 stocks, 17 are Buychart.com buys and 13 are sells.
The five 100% buys are Apple Inc. (AAPL), Salesforce Inc. (CRM), Intel (INTC), Microsoft Corp. (MSFT), and Walmart Inc. (WMT).
And the five 100% sells are Chevron Corp. (CVX), Walt Disney Co. (DIS), Goldman Sachs Group (GS), Unitedhealth Group Inc. (UNH) and Walgreens Boots Alliance (WBA).
The exchange traded fund, Dow Industrials SPDR (DIA), also is a 100% buy for traders who want a diversified portfolio during the second quarter earnings season, which begins next month. That is, instead of buying individual stocks, a trader could buy DIA. Or she could buy both DIA and stocks.
Note that DIA’s implied volatility is a very low 2%. That means traders won’t get very good options prices if they sell covered calls or cash secured puts on the ETF. So they may buy DIA and hold it for a swing trade or longer with a close (3% to 5%) stop loss.
When the IV is this low, LEAPs buyers often look for longer duration calls trades. A LEAP is a call option that expires in one, two or three years.
For example, a speculator might buy calls on a depressed Dow stock like GS, which is a 100% sell.
The trader would buy GS 6.21.24 expiration (358 days) $315 strike (delta .72, out of the money probability 46.5%) calls for about $40.75, or $4,075 per 100-share call option contract.
Then the trader could do a “poor man’s covered call” trade by selling a GS 7.21.23 (22 days) $345 strike (delta .13, OTM probability 87%) covered call for about $1.20. That would give the trader a 2.9% return on risk on the covered call trade. If the trader could do a trade like that 16 times in the next 12 months, the annualized RoR would be about 49%.
A .13 delta indicates that the probability that a call option will be called, or exercised, is about 13%.
This is example is for educational purposes. It is not advice. I haven’t done the trade, but I might. If I do, I’ll report that in the comments section.
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