After Rally, DIA Appears To Be Topping Out; Time To Sell Covered Calls Stock Options On Stronger Stocks, ETFs
The strategy is simple. Pick good under valued dividend stocks. I 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
Bearish traders could sell covered calls stock options on stocks or ETFs they own.
Covered calls trades are income trades and minor hedges against market corrections.
Weekly trades take more work but give traders greater visibility, which can reduce risk if trades are done at low deltas.
Higher delta covered calls trades will yield higher annualized returns for traders who think they can make quick profits on a small gain in the market.
Traders who are looking to get out of a stock or equity at a slightly higher price can sell at the money calls. Such trades provide higher returns on risk.
After the recent rally in the Dow Jones Industrials Average Index, profit taking or worse appears likely to make selling covered calls stock options on mega caps that investors own a good trade.
If the DOW drops while the trades are open, the trader will keep the options premium and DIA. Traders who are bullish on the markets could buy DIA and sell covered calls on it.
If DIA closes above its call strike price, it will be called unless the options are bought back before they expire. DIA tracks the DJIA 30 index.
At the beginning of earnings season, many options traders prefer to write covered calls and cash secured puts on exchange traded funds like DIA than on individual stocks.
By trading covered calls on the ETFs instead of individual stocks, dividend stock investors reduce the risks that come with surprises when companies report their first quarter earnings and announce revised earnings and revenues guidance.
With DIA at $348.01, a cautious speculator who owns the ETF could sell weekly or monthly covered calls at low deltas, which indicate a low probability that the calls will be exercised.
The weekly (a four-day) trade would involve selling DIA 4.8.22 $353 strike (delta .17) covered calls for about $0.25 to $0.35) per share. This trade would yield an annualized return on risk of about 8%.
Owners of DIA who want to get out of it at a slightly higher price could sell DIA 4.8.22 $350 strike (delta 34) covered calls for about $1.20. That would yield an annualized RoR of about 21%.
A 28-day trade might be to sell DIA 4.29.22 $350 strike (delta.43) covered calls for about $4.15. That would provide about a 16% annualized RoR.
Selling DIA 4.29.22 $358 strike (delta .18) covered calls for about $1.15 a share would yield about a 4.43% annualized return on top of DIA’s 2.66% dividend.
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. Links to useful web sites are on the lower right corner of the home page. Scroll down.
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A video on how to place options trades on Think or Swim.
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 own and have options positions on DIA. I reserve the right to trade any of the listed stocks and options at any time. I receive no compensation for producing this content or for any links.
@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.