Is covered call writing on dividend stocks the holy grail for the semi risk averse investor?
- Thread starter Daal
- Start date
So you do well 18 out of 20 years?
Covered call trader here. I see where your thread is going. I am writing this on 2/26/18. At Fidelity, in my money market fund, I will be getting over 1% yield...If the Fed raises rates it will jump higher. If it was me, I would buy JNJ (I have before...much cheaper) and would do a leap, out 13 months or so to a January. So what will I get with that leap...Just guessing? Maybe 3-5 dollars...Plus the dividend. Here is a key, plus the covered call money and the dividend money compounding in the money market fund. Years ago when you had money market funds paying a decent return, this trade works. It works on so many levels with the compounding of interest. As rates rise you will see more covered calls placed. Please buy mine...I'll walk way with my 7 to 10% return...Go on vacation for a week. Not even look at the market, and can come back when I want to!! For a retiree this is a great way to go. Go into the hospital for a week...Fine!! Die...Fine, the estate can handle the rest. It may take a little while to close the positions, but as long as you don't go over about 13-14 months you should be fine. This is NOT a crazy move for someone wanting some extra income...
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If it were only that simple. Making money with options involves good timing and selection. If you are into equities rather than indexes, you can have catastrophes during a bull market. How about VRX losing 90% from its peak (225 points)? Too risky a stock for you? How about a Dividend Aristocrat like GWW losing 100 points last year?
What money market accounts pay has nothing to do with covered calls.
The dividend you receive comes out of the cost basis of your stock. Don't confuse yield with total return. Premium is income, dividend is not. Getting 1% at Fidelity on a 2.55% JNJ yield isn't exactly the road to compounding riches.
Unless you're bearish, writing a 6 month OTM call is a better plan than writing a 1 year LEAP. If assigned, you'll get approximately double the return.
Everything works until it doesn't. As we all should know, this by itself is not the holy grail. FYI there is no holy grail. I use cover call to exit long position in conjunction with other trade setup. I've even use buy/write. More could have made buying the stock and wait to write the call at a later date, but that's hindsight. Can't lose money by taking a profit.
Don't listen to all the squids on ET, use what works for you.
Don't listen to all the squids on ET, use what works for you.
I said when the money market fund gets back to a normal range...4-5%. This concept works better with a stock like VZ...About a 5% dividend.
There's no magic there in terms of whether you do some simultaneous stock market strategy or not. When MM rates get back to 4-5%, you earn what everyone earns, 4-5%.
If VZ pays a 5% dividend, it's not free money. It doesn't increase the dollar value of your position. If anything, it decreases it due to taxation, if non sheltered. You're just withdrawing a portion of your position's value and shifting it over to the MM. The dividend only means something if you reinvest it, acquiring more shares and share price appreciates (compounding).
A few questions for my fellow Californian:
1. How long have you been writing covered calls?
2. Do you write your calls mechanically (on a regular basis without regard to the underlying price movement)?
3. Have you compared your overall returns to just buy and hold the underlying?
Thanks.
See below...I don't pay any taxes.