Our Quick Dividend Strategy
Our Quick Dividend Strategy
|Power Options Videos|
Now that you’ve had time to watch my put-selling tutorial, I’d like to introduce you to our other key income tactic — covered calls.
As I mentioned before, the only risk when selling puts is owning shares of the underlying stock. But when you only trade fundamentally sound stocks that pay out a decent yield, that’s not really a downside.
Especially if you use the covered call strategy, as we do.
A covered call is when you sell a call option against shares of a company you already hold.
Let’s say we ended up with shares of Microsoft. Since we now own the company, we start collecting the nice dividend it pays out. But as income seekers, we want to make sure we’re collecting as much income as we can. So we consider our outlook: Let’s say the stock looks like it will stay flat or trade within a narrow range in the short term.
With that in mind, we write a covered call on the company — selling one contract for every 100 shares we hold. And we make sure to pick a strike price that is higher than the price we paid for the shares.
Here’s the action we’d want to take:
|Example only: Action to Take|
|Option Type:||Call Option|
|Action:||Sell to Open|
|Order Type:||Limit Order|
|Duration:||Good ‘Til Canceled|
|Limit Price:||$1.50 (Anything above $1.50 is great.)|
|Trade Deadline:||If your order is not filled in the next week, I’ll update you on the trade.|
For a step-by-step walk-through of how to make this trade, remember to watch my Covered Call tutorial, part of your Power Options video package below.
A covered call is a conservative income-collecting strategy that allows us to immediately collect a premium — what I like to call an “instant dividend” — while capping our upside.
See, the premium from this transaction comes with an obligation: If the stock rises above the $55 strike price by expiration, the call could be exercised — meaning we would have to sell our shares at the strike price. Aka our upside cap.
That’s the only risk — but we still collect a profit because we picked a strike price that is higher than the price we originally paid for the shares. Plus, we’ve pocketed the premium.
Alternatively, there are two other ways the trade can go … and we’ll still collect income:
- If the shares stay relatively flat, as expected, and stay below the strike price by expiration, the option will expire worthless. We’ll simply walk away with the premium and continue to collect the stock’s nice dividend.
- If the shares fall by expiration, the option still expires worthless. And we still get to keep our premium while collecting the stock’s dividend.
It’s a win-win situation for us.
Well, now that you’re acquainted with the main Pure Income strategies, I think it’s time for you to see some frequently asked questions. So I’ll be back tomorrow, for day six of our Getting Started series, with a look inside the mailbag.
Talk to you soon.
Editor, Pure Income