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?
amber tree leaves 
I had to know why you would have sold Shell, could have known it had to so something with options 😉
Sounds like you got a fairly good deal out if it.
I think that with covered calls, the ‘risk’ is always there that you need to sell. I would just anticipate on it. It should not come as a surprise, so wouldn’t mind at all. IF I were into options that is 🙂
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The are no risk free options. I am happy that I do not feel sad!
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Ciao ATL,
Normally I do not like core stocks to be called away, but as you pointed out the returns can be pretty good, and I keep reminding myself that there are plenty of fish in the market there… Still, if I can defend the position, I would do so.
ciao ciao
Stal
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Defending is the first thing to do…
I have only ETFs as core position. So, Like you say, plenty of fish.
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Stocks being called away is fine if the strike price is above your cost basis and you collect more than the dividend in premiums. I don’t see it as a negative, because you can plan for it upfront!
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It was not planned, a good learning and there are nice gains.
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As long as you make money on a call, who cares! If you really want to get the stock back, you could buy at the next dip or write a call option near the money. Many options to make some more money (yes, pun intended).
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My options are working hard to buy it back cheaper….
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Why does that not surprise me 😉
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For me the income out of options is nice. I m just curious to see how I will digest a crash…
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I’ve got 6 call options at the moment, bring on that crash!
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Some on UNA I suppose. It is really priced high
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Smart cookie you are, but you are correct.
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used to do it the same way you do. If the stock is still in a good price range I write puts to collect the premium and perhaps get the stock back. If it is too expensive, on to the next stock that is attractively priced. And you have got to love the fact that option premiums are not taxed!
In this particular case it worked better for you: you avoided double taxation on the dividend and got the change to sell a new put on it, thus collecting tax free premiums!
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Let’s enjoy it while we can…
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One of the risks with a covered call but as you mentioned missing the dividend payment is no big deal especially when you look at the premium you received for that call option to begin with. Looks like a nice win with RDS.
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My view is that oil stocks will be in a trading range for the next couple of years. I would sell a put on RDS that expires in July since the next dividend date isn’t until Aug. or buy a Aug call option if it expires after the ex dividend date. If you are lucky, the put premium will pay for the call option and if the call option is in the money you can call the stock away and get the dividend.
I love the flexibility in option trading.
Cheers Rico
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As a hedge fund we neither sell or buy options. Options are just too volatile. In addition selling options does not give you a good risk reward. You have theoretically unlimited downside and limited upside
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Pls explain how you can have unlimited downside. When I sell a put, I have less risk that buying the stock at the current market price. When sellign calls, there is indedd the risk that the stock goes sky high. That is why I only do covered calls.
I see selling options as a way to generate extra income, using the fact that historically, people are willing to pay more for protection than the actual data suggests.
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