6 April Expiration Covered Calls Trades That Could Return 27% Annualized

The strategy is simple. Pick good under valued dividend stocks. We pick stocks with active and liquid options that can be used to generate weekly and monthly income by selling covered calls and puts.

By Donald E. L. Johnson

Cautious Speculator

• These three stocks and three ETFs combined might yield 27% annualized in covered calls premiums.

• Price to free cash flow ratios are low.

• XLE is strong. DGX, KFY, USB, XLV and XYLD are below 52-week highs.

• Chowder rule dividend returns and growth scores are strong.

• Dividends are expected to grow with profits and free cash flow.

Experienced investors in dividend paying stocks look for appreciating stocks in companies that have good dividend growth records and look like they will continue to grow their dividends.

Three stocks and three exchange traded funds combined in the above watch list would cost an investor who bought 100 shares of each equity on the list a net debit of about $49,067. Net debit equals stock cost minus the covered calls’ strike prices.

To make this dividend and covered calls watch list for April 14, 2022, covered calls options expirations, the key metrics were:

1. They pay dividends.

2. They have been growing their dividends and are expected to continue growing dividends, which makes them good inflation hedges.

3. Their Chowder one-year scores are 12 or above. The Chowder score is the sum of dividend yield and the one-, three- and five-year compound annual dividend growth rate, according to StockRover.com.

4. Dividend payout ratios are under 35%. This is more important when interest rates are rising.

5. The price to free cash flow ratio is under 20 times. The equities have a better chance having their prices rebound. When that happens, the calls are more likely to be assigned. That gives traders better short-term gains.

6. Their prices are below discounted cash flow fair value estimates and analysts’ mean consensus target prices.

7. Betas indicate they are relatively defensive stocks and ETFs.

If an investor sold one covered call option (100 shares per option) on each equity, their return on risk (RoR) would be about 2.99% on the 31-day trade. Theoretically, that would give them an annualized ROR that averaged about 27.5% if they could replicate those six trades 12 times over the next 12 months. In addition they would collect an average of 3.97%, or about $1,565 in dividends on the $50,279 cost of the stocks.

I created this spreadsheet to calculate returns on covered calls trades and to track my trades for the year to date and by the month. Please click on images and zoom in for better views.

Depending on an investor’s trading experience, risk tolerance, income targets and available trading funds, covered calls traders might trade one or more contracts for each of thee equities in this watch list. Investors also could do all or a few of these six trades and have similar trades that aren’t on this list. Click on the home page link below to see more watch lists and ideas.

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Question: Do you do trades like this on dividend stocks? Please use the comments section below to discuss.

LINKs:

Home Page. See previous articles on other stocks and watch lists. If you read several of these articles, you’ll learn how this strategy is meant to work. No guarantees.

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Beware

Like all investing, trading stocks and options is risky. If you can’t sleep with market risks, you might want to let someone else do your trading. Consider an option trading ETF like XYLD, which I own. I also trade its calls and puts. I’m an active private speculator who trades covered calls and sells puts on stocks for my accounts. I am not a professional analyst nor a financial advisor. I don't take and won't take responsibility for how other people trade. This article is for educational purposes only. It is not advice. The data presented looked accurate at publication time except for intra-day fluctuations, but I can’t guarantee the accuracy. Traders should do their due diligence. I reserve the right to trade any of the listed stocks and options at any time. I own USB, DGX and XYLD and have positions in their options. I have no business relationships with these equities. I receive no compensation for producing this content.

@realDonJohnson. Because I don’t want to litter subscribers’ in boxes with emails, I write only one or two newsletters a day. I’m active most days on twitter where I tweet about stocks, options trades and other topics.