The strategy is simple. Pick good under valued dividend stocks. These 10 have active and liquid options that can be used to generate additional income by selling covered calls and puts.
Don, when you write, "For dividend and income traders who want to speculate on these stocks and write covered calls, the strategy is to buy the stocks and pick options at strikes at the money (ATM). Then sell the calls."
This would only hold true if a person feels the stock price will stay about the same, or even decline, and is bearish on the stock, right?
If I am bullish on a stock I own, I would want to pick a strike that is out of the money and at a higher level than the current stock price, right?
Patrick, thanks for the chance to elaborate. Yes, in a bullish market, when you buy a stock that you think is going up, you sell low delta, higher out of the money (OTM) covered calls.
This market is bearish, and few stocks will go against that trend. Even some energy stocks are correcting because of their exposures to the Russia mess, their high debt levels and their product mixes.
When a market is dipping and correcting as the current one is, covered calls traders go for the biggest immediate RoR and hope that the stocks they buy and write covered calls on will have a chance of being called, giving them the premium income, capital gains income and sometimes capturing the quarterly or monthly dividend on the same trade.
After having a stock called, as you know, the next step in the wheel would be to sell puts on the same stock. Unless the stock is where you want to buy it, you would sell a low delta, deep out of the money put that would give you your target immediate RoR and hope the stock expires at a price above the puts strike. If the put is assigned, you have to decide whether to take the stock or buy back the put before expires.
I'm mostly taking assigned stocks, but that so far is not working out as well as I hoped. This is because the stocks not only dropped 8% to 10% and closed below my puts strike, after I "bought the shares" in the assignment process, the stocks kept falling. Weak stocks do that.
In other words, selling puts can be expensive if you are under capitalize and don't know how to play the wheel or don't want to.
Again, Patrick, thanks for the comment. I like some of the trades you're doing. Keep it up.
Thanks for that explanation Don. Sometimes I have to read these techniques 5 times and practice them 3 times for them to sink in. There is so much to consider and think about. At times, it feels like I am trying to thread a needle this market.
Don, when you write, "For dividend and income traders who want to speculate on these stocks and write covered calls, the strategy is to buy the stocks and pick options at strikes at the money (ATM). Then sell the calls."
This would only hold true if a person feels the stock price will stay about the same, or even decline, and is bearish on the stock, right?
If I am bullish on a stock I own, I would want to pick a strike that is out of the money and at a higher level than the current stock price, right?
Patrick, thanks for the chance to elaborate. Yes, in a bullish market, when you buy a stock that you think is going up, you sell low delta, higher out of the money (OTM) covered calls.
This market is bearish, and few stocks will go against that trend. Even some energy stocks are correcting because of their exposures to the Russia mess, their high debt levels and their product mixes.
When a market is dipping and correcting as the current one is, covered calls traders go for the biggest immediate RoR and hope that the stocks they buy and write covered calls on will have a chance of being called, giving them the premium income, capital gains income and sometimes capturing the quarterly or monthly dividend on the same trade.
After having a stock called, as you know, the next step in the wheel would be to sell puts on the same stock. Unless the stock is where you want to buy it, you would sell a low delta, deep out of the money put that would give you your target immediate RoR and hope the stock expires at a price above the puts strike. If the put is assigned, you have to decide whether to take the stock or buy back the put before expires.
I'm mostly taking assigned stocks, but that so far is not working out as well as I hoped. This is because the stocks not only dropped 8% to 10% and closed below my puts strike, after I "bought the shares" in the assignment process, the stocks kept falling. Weak stocks do that.
In other words, selling puts can be expensive if you are under capitalize and don't know how to play the wheel or don't want to.
Again, Patrick, thanks for the comment. I like some of the trades you're doing. Keep it up.
Don
Thanks for that explanation Don. Sometimes I have to read these techniques 5 times and practice them 3 times for them to sink in. There is so much to consider and think about. At times, it feels like I am trying to thread a needle this market.
Thank Patric. I think we're all threading needles in this market. Today I'm rolling covered calls.