I went through your logic. Your strategy actually makes sense if you are holding the underlying long term and with some good timing. Handle123 called the strategy using options to dance around your stock holding.
Thanks for sharing.
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Is covered call writing on dividend stocks the holy grail for the semi risk averse investor?
- Thread starter Daal
- Start date
Thanks for sharing.
I went through your logic. Your strategy actually makes sense if you are holding the underlying long term and with some good timing. Handle123 called the strategy using options to dance around your stock holding.
Thanks for sharing.
Ironchef, I think of Warren Buffett a few years ago buying a railroad. Many thought he was insane...Or too old to make wise choices. We all know you never won at Monopoly buying railroads!! I would have thought the man insane if it was anyone other than Buffett. We knew he had a game plan. We knew he would buy undervalued companies where he saw both value and cash flow. Below is the story. I still am shaking my head at the idea...
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&ved=0ahUKEwjP4Ov1ksrZAhVj0YMKHWoBCN0QFggwMAE&url=https://www.bloomberg.com/gadfly/articles/2016-11-11/berkshire-hathaway-bnsf-railroad-deal-shines-bright-in-hindsight&usg=AOvVaw1WG63lUqGsm65cmdmcKS4B
Many claim that all they have to do is buy a dividend stock and they can live off of the dividends. The DGI crowd is fanatical about this but they conveniently ignore that the stock must rise in order to turn that so called "free dividend money" into Total Return. I know that you get it now but back to the VZ example to top this off.
It's 2008 and VZ is $42 with an annual dividendof $1.75 . A Jan 2009 covered call is written for $2. At expiration, VZ is $28.
Total Return = Cap Gain + Dividend + Interest
Because the Interest earned on the dividend is small, let's keep it simple and ignore it. Let's break Cap Gain into two parts (loss on stock and call premium).
Total Return is -$10.25 (-$14.00 +$2.00 + $1.75). In reality, VZ only dropped $12.25 due to selling and the remaining $1.75 of drop was due to share price reduction on the ex-div date by the stock exchange. IOW, the dividend was payment to yourself from your money in your brokerage account.
Or to really keep it simple, Joe Schmo buys VZ at $42.00 and doesn't monkey with options. A year later, Joe has $1.75 in dividends in his pocket. VZ didn't move a penny from buying and selling and is now $40.25 due to ex-div share price reduction. If Joe spends his $1.75, he has an equal offsetting capital loss of $1.75. He got a nice Yield of 4.17% but a Total Return of ZERO. The dividend got him nowhere and if non sheltered, he's even worse off with a negative Total Return due to taxation.
It's 2008 and VZ is $42 with an annual dividendof $1.75 . A Jan 2009 covered call is written for $2. At expiration, VZ is $28.
Total Return = Cap Gain + Dividend + Interest
Because the Interest earned on the dividend is small, let's keep it simple and ignore it. Let's break Cap Gain into two parts (loss on stock and call premium).
Total Return is -$10.25 (-$14.00 +$2.00 + $1.75). In reality, VZ only dropped $12.25 due to selling and the remaining $1.75 of drop was due to share price reduction on the ex-div date by the stock exchange. IOW, the dividend was payment to yourself from your money in your brokerage account.
Or to really keep it simple, Joe Schmo buys VZ at $42.00 and doesn't monkey with options. A year later, Joe has $1.75 in dividends in his pocket. VZ didn't move a penny from buying and selling and is now $40.25 due to ex-div share price reduction. If Joe spends his $1.75, he has an equal offsetting capital loss of $1.75. He got a nice Yield of 4.17% but a Total Return of ZERO. The dividend got him nowhere and if non sheltered, he's even worse off with a negative Total Return due to taxation.
I went through your logic. Your strategy actually makes sense if you are holding the underlying long term and with some good timing. Handle123 called the strategy using options to dance around your stock holding.
It makes sense if you want income over growth and you're willing to accept the asymmetric R/R ratio.
Yes I see your point but read this:It makes sense if you want income over growth and you're willing to accept the asymmetric R/R ratio.
https://www.optionseducation.org/co.../literature/files/perf-options-strategies.pdf
Yes I see your point but read this:
https://www.optionseducation.org/co.../literature/files/perf-options-strategies.pdf
It seem that in the study, the covered call worked the best on the boring, mature, industry leaders (WFC and XOM). For the growth stocks (high flyers), the cover call didn't work as well. That is why I choose stocks like WFC, XOM, ADM, T, VZ. They are industry leaders, mature, consistent dividend companies. Yeah, boring...Like I said, I'm 62. I live in California...Wake up sometimes between 9 and 10 am. 1/2 the market is over by then!! Many of my orders are done the night before...Or in the afternoon EST. Even if they don't get called away (2007)...I usually have a boring stable company that is paying a dividend in that bear market. Yeah, that VZ is a paper loss. I'll do a leap for a year out when it expires...At $35. I'll recoup some of my money...Hoping it doesn't get called away. The next year I'll do another leap. Does it work better than buy and holding the widow and orphans stock?? Yes!! The above shows it...
Yes I see your point but read this:
https://www.optionseducation.org/co.../literature/files/perf-options-strategies.pdf
How about providing me with the Cliff Notes version of what you think the takeaway is from that link. Reading 36 pages of a study is a bit much for me to digest in order to guess at what you are implying in rebuttal.
Even if they don't get called away (2007)...I usually have a boring stable company that is paying a dividend in that bear market. Yeah, that VZ is a paper loss. I'll do a leap for a year out when it expires...At $35. I'll recoup some of my money...Hoping it doesn't get called away. The next year I'll do another leap. Does it work better than buy and holding the widow and orphans stock?? Yes!! The above shows it...
Success with covered calls is about timing and selection. Pick a VRX and I don't care how much premium you took in because losing 90% of your stock value kills you either way. Yes, you do better than the long only holder in a bear market but it's a Pyrrhic Victory.
As for that "boring stable company that is paying a dividend in that bear market", haven't we already settled that you're getting paid with your own money? Aka, ZERO total return?
If income is the goal and if you're going to do buy & hold come hell or high water, you might consider selling nearer term options in order to bump up the ROI. Perhaps 6 months? If you sell a one year OTM covered call and the stock is ATM in 6 months, you'll have only 50-60% of your max gain and you'll be tied up for another 6 months waiting for the balance. And if the stock reverses in the second 6 months, ba-bye 60% gain. In this case, do the 6 month and either roll the call or book the booty and move on.
How about providing me with the Cliff Notes version of what you think the takeaway is from that link. Reading 36 pages of a study is a bit much for me to digest in order to guess at what you are implying in rebuttal.
Cliff Notes...Don't read the math (Xs and Os [means/standard deviation])...Look at the graphs (WFC/XOM). It is (was) better than buy and hold on these stocks. For me, leaps may come into play for the trust accounts (tax issues)...Long term vs short term. They don't come into play with my ROTH IRAs. Don't know how Trump's tax policy will effect 2018 or 2019 taxes yet.
I'm asking myself, "Why I am bothering with this?" "That's a good question", I answered myself. Be that as it may...
This study concludes that that the covered combination and covered call strategies outperform the long stock strategy which outperforms the collar and protective put strategies. I assume that's on a risk adjusted basis rather than actual $$ performance since the very last chart shows that put protected stock and the collar did far better than the other too. Honestly, it's too much effort to waste time on sorting this out.
What I will say is that put protected stock is equivalent to a buying a call. The study couldn't figure that out?
Also, since their covered combination is defined as long stock plus short call plus short put, all that means is that you're doubling up. It should obviously generate greater return. IOW, a covered call is equivalent to a short put so this covered combination is equivalent to:
1) long stock plus short call plus short put (as they described)
2) two covered calls
3) two short puts
Whether they adjusted for size to compare equally, I dunno and I don't care. Studies like this prove nothing because 1/2 the time, the academic pinheads doing them are far removed from the reality of trading... and 10 stocks plus a market proxy proves squat.
This study concludes that that the covered combination and covered call strategies outperform the long stock strategy which outperforms the collar and protective put strategies. I assume that's on a risk adjusted basis rather than actual $$ performance since the very last chart shows that put protected stock and the collar did far better than the other too. Honestly, it's too much effort to waste time on sorting this out.
What I will say is that put protected stock is equivalent to a buying a call. The study couldn't figure that out?
Also, since their covered combination is defined as long stock plus short call plus short put, all that means is that you're doubling up. It should obviously generate greater return. IOW, a covered call is equivalent to a short put so this covered combination is equivalent to:
1) long stock plus short call plus short put (as they described)
2) two covered calls
3) two short puts
Whether they adjusted for size to compare equally, I dunno and I don't care. Studies like this prove nothing because 1/2 the time, the academic pinheads doing them are far removed from the reality of trading... and 10 stocks plus a market proxy proves squat.