E Have You Considered This Dual Income Strategy?

Investors of all ages and investing experience levels are sure to welcome an additional income stream! When writing call options (i.e., selling call contracts against existing stock shares), the main objective is generating income. If the stock ends up above the call strike price at expiration, then the call is exercised and the trader ends up selling the stock shares. Being “covered” means that the investor has the stock shares in his account to deliver if the shares are “called away” from him.

By using high yield stocks as the underlying investment, we can generate two streams of income in this strategy.

  • First, we collect a premium every time that we sell another call option against our stock position.
  • Second, we also collect dividends on our stock position, typically on a quarterly basis.

These two streams of income are even more impressive when you consider the fact that bonds are currently offering very little value (low yields) to investors.

By utilizing this dual income strategy, we have the potential to consistently generate income. To be more specific, our goal is to generate income on a monthly basis in the covered calls. With this dual income strategy, we have the potential to generate 16 different pieces of income per year (monthly for the covered calls and quarterly for the dividends). Selling one covered call per month = 12 credits annually. Collecting a dividend every three months = 4 credits annually.

For example:

Statoil (STO) currently trades around $17.90/share. Statoil engages in exploration, production, transportation, refining and marketing of petroleum in Norway and internationally.

As of this writing, we could sell an April 17th (monthly) at-the-money 17.50 strike call that expires in about one month. At current prices, this will generate +0.80 (or +$80.00) per call option sold. Based on the $17.90/share price, this is a true income of about +2.3% of the stock value for selling an option.

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Disclosure: This is not a recommendation to buy/sell any of the securities mentioned in this article.

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