In order to boost my return from stock, I write options. As with all kind of investing, this is not without risk. And who takes risk, gets return.
As part of my initial play money portfolio, I had bought RDS.A stock in order to gain experience with covered calls. Not so much later, I switched to selling puts as well. The results are fine and well above the dividend returns.
The one attention point with covered calls is the dividend. When the ex-dividend date is coming closer and your call is in the money (this means that the strike of the option if lower than the market price), then the owner of the options is very likely to call the stock away from you. Why? He can buy the stock cheaper from you than on the market and on to of that, he can get the dividend as well.
My RDS.A stock were well in the money and the ex-dividend dat was coming closer. A defence against this is to roll the option out in time and collect more money from the roll. Sadly, I was too occupied to do this.
My RDS.A are now called away and I did not get the dividend!
Should I be sad?
Not at all, here is why.
- The money from the calls represents 2,76 quarters of net dividend income. That is not bad as a compensation.
- With the stock being called away, I have about 1 year of dividend in actual capital gains.
- I used the money to write a cash secured put. This adds another 1, 5 quarter of dividend to my net income.
Conclusion: I lost 1 quarter and gained 7,2 quarters of dividend. I thus have approximately 1,5 year to buy back the stock at the same price.
In fact, I have more time. As long as I do not buy the stock, I keep writing puts. Either on this stock or another stock that represents a better opportunity. The income from these puts should exceed the dividend. (Especially with the double taxation that I have on dividends.)
Is that a guarantee? No, not at all. It is an opportunity to increase my options portfolio size and related monthly income.
I am happy to see that I do not fall in love with my stock and have the need to buy it back at all cost.
How do you react on stock being called away?