How To Use Deltas When Selling Covered Calls On A Stock Like MO

The strategy is simple. Pick good under valued dividend stocks. MO has active and liquid options that can be used to generate additional income by selling covered calls and puts.

By Donald E. L. Johnson

Cautious Speculator

• Altria (MO) goes ex-dividend March 24.

• To capture the dividend and the covered calls premium, trade a higher strike and lower delta, which indicates the probability that a call will be exercised.

• Selling covered calls and cash secured puts for the premium income is a swing trading strategy.

• Paying income taxes on profitable options trades is the cost of doing business.

A SeekingAlpha.com commenter asked about how to use deltas when selling covered calls on a high dividend stock like Altria (MO). The reader also asked about income tax considerations when doing these trades.

I posted the following lightly edited comment:

My tax advisor says put high dividend stocks like MO in a tax sheltered account like an IRA or a Roth. That's what I do.

As a Stock Picker and Options Trader for Income, I don't worry about income taxes.

Trading covered calls and cash secured puts for income and some capital gains is a swing, short-term strategy by definition.

For me, it is a business. I'm used to paying taxes on my profits and would hate to have no profits and pay no income taxes. Taxes are a cost of being in this business.

This is not a business for people who are more worried about taxes than a steady stream of dividends and options premiums income, which is what this strategy is all about.

On the delta greek. When I buy a stock like MO aiming to capture the next dividend, I buy the stock and sell a low delta (.05 to .15) covered call. That way the stock has about a 5% to 15% chance of being called before the stock goes ex-dividend.

MO goes ex-dividend on March 24.

So you might sell MO 3.25.22 $56 strike calls for about $0.25 a share on a 100-share call option. RoR annualized would be about 6.5%. On top of the 6.84% dividend, that gives you a nice annualized RoR. If the stock is called, you get an immediate 6.3% RoR. If you can replicate that trade on any stock or equity about 15 times a year, your annualized RoR would be 76%, give or take.

The risk is that the stock could drop $5 over the next 23 days. In that case, you take your premium to the bank and write a MO 4.14.22 $57.40 call for a 20% to 25% RoR, depending on where the stock price is on March 28.

MO’s support at the 50-day moving average is $49.79.

If you own MO at a profit and are looking to cash in, you could sell MO 3.18.22 $54 strike (delta .31) calls for about $0.56. Annualized RoR on the trade would be about 23% plus dividends plus your capital gains.

This is not advice. It's meant to be educational. I don't own MO and don't plan to.

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Question: What questions do you have about this strategy? We can discuss it in comments.

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 don’t own MO.

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

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