Yield booster from options – case study

What can options mean to your dividend yield? Now that 2016 is over, I can give a real life example of what it means to my yield.

During 2016, I have owned the same number of a specific ticker throughout the year. The company is a a dividend aristocrat. I own it to get a real life feeling of what dividend investing could be. On top of that, I sell options against my position: both naked puts and covered calls. 

What do the numbers tell me?

Dividend income

Compared to my cost basis (the cost basis is not so far away from the current price), I have an after tax dividend yield of no less than 4,54 pct!

By all measures this is beyond the average return that you can get on my countries index! Not all dividend stock pay such a high net yield, that is for sure.

Option premium

The total option premium yield I got out of this stock is 3,27 pct! That is a nice booster. It represents a 72 pct increase of my dividend yield. That is not bad at all. I almost doubled my dividend income on that stock!

Not all options that I sold were profitable by expiration. That means that I was at risk at some point of time to be assigned. What does that mean?

For my call options: I could be called away the stock at the strike price. As a result, I would no longer own the stock and no longer get the dividend. I would make some capital gain and get the option premium.

For my put options: I could be forced to buy at the option strike price. As a result I would own more stock, have more potential dividend and can sell calls against the stock (warning: you need the cash to actually buy the stock…!)

My option strategy is to avoid this. I am only interested in the premium, not assignment. As a result, some options were rolled multiple times. The longest open period was 223 days, and then 131 days. That means that during multiple months, I needed to keep the option.

Covered calls account for 2,17 pct of this result, naked puts account for 1,10 pct of the return.

During most of the year, the stock was below my costbasis, limiting my possibilities to sell covered calls.

Going forward

For 2017, I will be pursuing this strategy even more. The aim is to have covered calls against all my dividend stock, every time when possible. (This means I can get a decent premium for a stricke above my cost basis).

As a result, I have now all my stock on this ticker used for a covered call. The call is in the money, so, I risk to be called away. Puts have to wait, as I am at my maximum risk threshold that I set for myself. I hope to have puts by mid February.

 

Disclaimer: this is only one stock that is analyzed. This is not at all a guarantee for future succes when you would apply this strategy yourself. This is my own opinion, not an encouragment for you to trade. This is for pure entertainment.With stock and options, you can also loose money, there are no guarantees. Do your own homework

 

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14 thoughts on “Yield booster from options – case study

  1. Naked puts, pretty ballsy! I only did it when I knew that by expiry date I would have enough saved to actually be able to buy the stock if assigned.
    Let’s say assignment would mean needing 6.000 euro and expiry is end of year. And I only had 2.000 euro at the moment. Then I would do it because premium was 500 euro and I knew I could save the remaining 3.500 euro before expiry date (there is off course always the possibility to be exercised before expiry date but my broker luckily is nice enough to lend you the money at a reasonable rate, the debt would just have been an extra incentive to save quicker!)

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  2. ATL, you and I take almost the exactly same approach. I used to trade some ETF’s that didn’t have option trading, but I’m gradually selling those out of my account, replacing them with ETF’s that have options. Both naked puts and covered calls are a nice, conservative way to boost yield. It’s amazing to me that so few folks trade them.

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  3. Awesome post! This yield booster is a great strategy for folks in the savings/accumulation phase. But even better for the FIRE crowd in or close to retirement. Those 2-3 extra percentage points of yield come in very handy for everybody in need of reliable passive income! Quite amazing that this is not more popular in our circles.

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  4. However, selling options is not really “passive” income, in the sense that it is not something you set and forget. Quite the opposite, options need to be monitored, rolled if necessary, occasionally there are assignments to be taken care of. In other words, there is some work involved.

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    1. There are very, very few types of passive income that require truly zero maintenance.

      Option-selling can be done with less than one hour per month, and scales more from your capital than your time. In that sense, it’s about as passive as it gets. Even just a buy-and-hold dividend portfolio requires some pruning once in a while.

      Day-trading options would be another story altogether, because it requires so much time and the money stops flowing as soon as you stop. That would not be passive.

      Liked by 1 person

      1. Thx for pointing that out. The term passive income is indeed a little misleading.
        The rental I used to own was quite passive most of the time. When something happened, it needed immediate attention and often I needed to go on site…

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