5 Dividend Stocks For June Covered Calls Trades
Covered calls may look boring, but they usually are good income producers.
By Donald E. L. Johnson
Cautious Speculator
5 boring, low beta and low risk stocks in a bear market may generate 21% annualized returns on risk in covered calls trades.
Selling covered calls is less complex and more likely to provide desired annual income than speculating on high momentum stocks or depressed stocks.
Buying 5 to 12 good dividend stocks and selling covered calls on them works best in bull markets but also can be profitable in bear markets.
Selling covered calls on 5 to 12 good dividend stocks may look boring, but it’s usually a good way to enhance dividend income with stock options premiums.
On Thursday, May 18, I bought these five low beta, relatively low risk stocks and sold mostly at the money (ATM) covered calls on them. The average annual premium returns on risk (ARoR) on the 28-day trades will be about 20%, if they are not called on June 16.
If the stocks are assigned, or called, the average 21% annualized gains would bring the total AROR on my June portfolio to about 41%. Stocks are called when they close above the strike rices on covered calls trades on the days that the call options expire.
Given that we’re in a bear market rally led by a few big tech stocks, the probability that these calls will be assigned looks like a 50% probability, I think. Last Thursday, It appeared that President Biden and House Republicans were more likely to make a deal on the debt ceiling. So I felt a bit more comfortable buying stocks for covered calls trades than I have been over the last couple of months.
Whether a deal is likely is still up in the air. So the stocks and trades shown in this blog should be treated as a watch list and an example of how to trade covered calls for options premium income. These trades are being reported for educational purposes. They are not recommendations.
The five stocks include Conagra Brands Inc. (CAG), Kimberly Clark Corp. (KMB), Kroger Co. (KR), Proctor & Gamble Co. (PG) and J.M. Smucker Co. (SJM). Most of these stocks were correcting when I bought them and sold the covered calls. On May 19, they ticked up a bit. Markets look like they’ll open a bit higher Monday.
All of the stocks but CAG are rated buys by Barchart.com. None are over bought nor over sold. A stock’s 100% buy rating means all 13 momentum indicators tracked by Barchart are bullish.
My spreadsheet shows the covered calls trades that I did last week. Click on the images and zoom in for better views.
That is, for example, I bought CAG for $35.76 per share, or $3,576 per 100 shares. Then I sold CAG 6.16.23 expiration $36 strike calls for $0.65, or $65 per contract. That gave me a return on risk (RoR) of 1.82%. If I can do the same trade 12 times a year and get the same ROR on every trade of this or any stock, the AROR will be about 21.8%.
I always do these trades on several stocks or exchange traded funds (ETFs) instead of putting all of my money into one trade. This diversifies my risks. Another way to further diversify risks is to do the trades on different days and to trade longer and shorter duration trades. In any case, because I do more than a dozen small trades a month, I almost always make money every month doing these trades even if one or two of the trades loses money.
I do mostly weekly and monthly covered calls trades and monthly and 45-day sales of cash secured puts trades. Selling covered calls and selling puts are income trades.
See the link to my home page to see other articles that I’ve written about selling covered calls and cash secured puts for income.
How to sell covered calls
There are several ways to do the covered calls trades.
An investor can buy 100 shares of each stock and write (sell, or buy/write) one covered call option contract for 100 shares of each of the five stocks for a total of about $53,048. After collecting the $690 worth of call premiums, the net debit would be about $52,359, depending on the prices of the stocks and calls.
If an investor wants to put $25,000 into the strategy, she could buy the two or three stocks that together cost about $25,000 and sell calls on them.
Other investors might want to put an equal amount of money into each stock. Because the highest priced stocks are about $151 per share, or $15,000 per 100 shares, this strategy would require buying from about 100 to 400 shares of each stock. That would bring the total investment to about $75,000, give or take.
Investors who want to put more money into the strategy could increase their investments accordingly to $30,000, $45,000 or more per stock.
Of course, investors might use this strategy as part of their investment strategy. That is, they also could own stocks without selling covered calls on them. They could sell cash secured puts on these or other stocks aiming to buy the stocks at lower prices. And they could buy calls and bull call vertical spreads on various stocks instead of buying the stocks.
Every investor’s resources, time horizons and income targets are different. So there is no trade that works for all. Due diligence and experience helps a trader decide what and how to trade.
Risks
The risks of buying selling covered calls are that the stock prices could fall or plunge before the calls expire. Or the price of the stock could soar far above the strike price, which is the price the investor has to sell the stock for if the stock closes a penny above the stock price on expiration day. For example, if CAG closes for $40, I’ll get only $36 for it.
But that will be fine, because I’ll get a $1.24 in addition to the $0.65 premium I collected when I sold the call. If I can do that kind of trade several times a year, I’m happy.
If the stock closes below $36, the options will be worthless. I’ll collect the call premiums and sell July covered calls on the stock, or I might sell the stock, depending.
LINKs:
Home Page. See my more than 100 articles on options trading, stocks and watch lists. If you read several of these articles, you’ll learn how my strategies are meant to work. No guarantees. Links to useful web sites are on the lower right corner of the home page. Scroll down.
Follow @realDonJohnson on twitter.com and FaceBook.com. Or follow me on Substack Notes where my byline is my handle.
Selling in The Money Covered Calls Can Yield Big Annual Returns on Risk. By Donald E. L. Johnson
20 Ideas for Adjusting Your Stock and Bond Portfolio, by Christina Lourosa-Ricardo.
How to Beat Inflation Tax, Bear Market Tax With Dividend Stocks, Covered Calls, Cash Secured Puts, by Donald E. L. Johnson.
Wars Breed Inflation, Rising Interest Rates, Market Turmoil, By Donald E. L. Johnson.
Ways to use StockRover.com to analyze stocks
Calls vs Puts Options: What’s the Difference?
A video on how to place options trades on TDAmeritrade.com’s Think or Swim trading platform.
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As always Don appreciate your detailed articles....very easy to read and understand!