E Have You Considered This Dual Income Strategy?

Remember, 0.40 (17.90 stock price – 17.50 strike price) of the option income is “intrinsic value” and is a return of capital. The true income is the 0.40 of “extrinsic value” or “time value” received. So, that’s +2.3% (0.40 true income / 17.10 cost basis) of income received in just one month’s time!

The obligation in writing each covered call is to deliver 100 shares of STO stock at April expiration for $17.50/share. However, if that happens, then we get to keep the $80.00 per call option sold of income no matter what! If the stock is at $17.50/share or lower at option expiration, then the call expires worthless, we keep our stock and we have made the “true value” of $40.00 of income per call option sold.

Now, what if the stock is below $17.50/share and we end up retaining the shares?

The true risk to this strategy is the share price. If the stock falls sharply in the months/years ahead, then you could be constantly “swimming upstream” and it would be difficult to get ahead. However, if there is a “fundamental” belief that the shares will be stable to higher in the future, then this strategy can be a solid one!

Statoil pays a forward annual dividend yield of 5.8%. This is way more income than the yield on a 10-year Treasury bond (now around 2.0% annually). Now, it is too aggressive to assume that we can annualize the covered call income above (i.e., +2.3% per month x 12 months per year = +27.6% return annually). However, if we can make even a fraction of that annualized covered call income every year plus the 5.8% annual dividend yield, then as long as the stock is stable, this dual income strategy really can be a home run for investors!

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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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