Comments on: Converting Non-Dividend Stocks Into Dividend Stocks https://www.thebluecollarinvestor.com/converting-non-dividend-stocks-into-dividend-stocks/ Learn how to invest by selling stock options. Fri, 25 Jan 2019 12:03:40 +0000 hourly 1 By: Alan Ellman https://www.thebluecollarinvestor.com/converting-non-dividend-stocks-into-dividend-stocks/#comment-193765 Fri, 25 Jan 2019 12:03:40 +0000 https://www.thebluecollarinvestor.com/?p=17456#comment-193765 In reply to Jay.

Jay,

Great points. GLD has frequently earned its way onto our premium member ETF Reports. In our most recent report, GLD has been up in price 4% over the past 3 months compared to the 1% decline in the S&P 500. The implied volatility of GLD was at 9.23 (as of Wednesday evening) while that of the overall market was 16.96.

Alan

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By: Alan Ellman https://www.thebluecollarinvestor.com/converting-non-dividend-stocks-into-dividend-stocks/#comment-193478 Wed, 23 Jan 2019 22:54:55 +0000 https://www.thebluecollarinvestor.com/?p=17456#comment-193478 This week’s 8-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options as well as the implied volatility of all eligible candidates.

New members check out the video user guide located above the recent reports.

For your convenience, here is the link to login to the premium site:

http://www.thebluecollarinvestor.com/member/login.php

NOT A PREMIUM MEMBER? Check out this link:

http://www.thebluecollarinvestor.com/membership.shtml

Alan and the BCI team

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By: Mariog https://www.thebluecollarinvestor.com/converting-non-dividend-stocks-into-dividend-stocks/#comment-193427 Wed, 23 Jan 2019 07:54:22 +0000 https://www.thebluecollarinvestor.com/?p=17456#comment-193427 In reply to Jay.

Great tips, Jay. Reminders on ways to diversity an investment. On a volatile market we have to day will be a winning strategy some of the time.

Mario

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By: Mariog https://www.thebluecollarinvestor.com/converting-non-dividend-stocks-into-dividend-stocks/#comment-193369 Tue, 22 Jan 2019 13:35:17 +0000 https://www.thebluecollarinvestor.com/?p=17456#comment-193369 Ralph,

Complementing Alan’s comments here is my analysis.
Excellent pick and and nice to see the quick rise to the OTM strike at the very beginning of the cycle.

2/15/19 Buy 100 Sh ALRM at 56.28 (underlying)
2/16/19 STO 1Cn 60CA at 1.85 (OTM Call)
Return Cost Basis (RCB) = 56.28
Breakeven 56.28 – 1.85 = 54.43
ROO (remains at 56.28) = 1.85 / 56.28 == 3.29% (Gain or Profit = .0329 x 56.28 x 100 = $185.16, or $1.85 x 100 = 185)
Upside Potential (3.72) = 60 / 56.28 == 6.61%
Total Return if price remains above 60 and exercised or assigned at expiration: 3.29% + 6.61% = 9.9% (Gain = .099 x 56.28 x 100 = $557.17. Check – 1.85 + 3.72 == 557.00 / 100 shares
******

2/18/19 ALRM rises and closes at 60.38, ITM for your strike 60 call.

From Option Table for ALRM Strike 60 Bid Ask is 2.70 / 3.00 or midpoint of 2.85.

If you unwind your position with this BTC premium (Mid Contract Unwind (MCU) exit strategy) (Unwind now Tab if Use Ellman Calculator-Pg 264 Encyclopedia Vol. 1), here are the calculations:
* 2.85 corresponds to an intrinsic value of 0.38 and Time value of 2.47 (underlying 60.38). The cost to close with a time value of 2.47 is 2.47 / 56.28 is 4.39% using the original cost basis as reference. (The Ellman calculator uses the Strike as a reference for a value of cost to close of 2.47 / 60 = 4.12%).

The net return is then 9.9% – 4.39%=5.51%. Gain is then .0551 x 56.28 x 100 = $310.00. Alternatively using the time value changes 1.85 + 3.72 + 2.47 = $310.00 / 100 shares.

To guarantee a max loss of 4.39%, you can place a combination order to Sell the covered call (sell with a buy to close) with a credit limit of (Strike – Time Value) = 60 – 2.47 =57.53. This equation, which I have discussed in an earlier blog post, for the credit limit is only valid for ITM calls, not OTM calls.

As Alan mentioned the Cost to cost loses 4.39% is your net profit (Ellman calculator show 4.12% cost to close using the current strike as reference, but 4.39% is the loss to your net profit) so your profit would be improved by waiting for the time value to decay to a more optimum value as described in Exit Strategies for a Mid Contract Unwind. Alan generally recommends you close if you can find another investment and realize a return ROO of 1% plus the cost to close.

For a stock that has gapped up, I generally set a threshold at an initial combination open order credit limit of .1% (try for the best) and later adjust it. Sometimes a stock spikes up on market open or other situation and the order fills. So for .1% loss to close for the ALRM trade I would set the credit limit for the unwind at 60 – 0.056 = 59.94. (0.1% of 56.28 = .05628). For a 0.1% loss, your closing trade will only lose $5.63 per 100 shares.

Depending on your broker and the number of contracts purchased, the commission can affect your loss in similar proportion to the time value. For a single contract 100 share purchase and $10 combination commission, the loss per share is 0.10 which is another 0.2%.

Mario

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By: Alan Ellman https://www.thebluecollarinvestor.com/converting-non-dividend-stocks-into-dividend-stocks/#comment-193362 Tue, 22 Jan 2019 11:50:37 +0000 https://www.thebluecollarinvestor.com/?p=17456#comment-193362 In reply to Patti.

Patti,

Welcome to the BCI community. You have asked excellent questions.

1. This type of price movement (down 10% then up 35%) is not typical for most stocks that meet the BCI criteria. The volatility can be evaluated by viewing the time value option returns [use the “multiple tab” of the Ellman Calculator and look at the “ROO” (return on option) column]. If ROO is too high for near-the-money, 1-month returns (say >6%) we may want to use a different underlying depending on personal risk-tolerance. Part of the issue with LULU was related to a disappointing earnings report (on 12/6) which must be avoided in the future.

2. Covered call writing lowers our cost-basis and that is why we should beat the market on a regular basis. Also, the specific screening for covered call writing is geared to short-term commitments.

3. Elite-performers from both fundamental and technical perspectives give us the best chance for success. If our initial trade structure gives us a chance for a 6%, 1-month return and share price moves even higher than the strike, who cares, our maximum return has been achieved.

Alan

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By: Patti https://www.thebluecollarinvestor.com/converting-non-dividend-stocks-into-dividend-stocks/#comment-193361 Tue, 22 Jan 2019 07:48:38 +0000 https://www.thebluecollarinvestor.com/?p=17456#comment-193361 Hello Alan

I am new to the covered call and option trading concept. I have been trying to learn as much as I can, but I do have a question on stocks that skyrocket in price. At the beginning to mid December I wanted to jump in and try doing some paper calls. This was before I learned what to look for in a stock. I am Canadian so I picked Lululemon (LULU) and I am in the technology industry so I picked Salesforce (CRM).
I bought LULU for $127 and did my covered call, @ strike of $127 the price dropped to $113, but that was ok, cause I was learning, (earnings report came out) so the next call I did at strike of $125 and lo and behold the stock zoomed up to $152 – needless to say I did make money, but not as much money as I would have if I just held the stock. The same thing basically happened with the CRM stock – bought it at $137 and again the stock zoomed to $152. So my first question, I know it was just dumb luck picking the stock, but is this normal for stocks to jump this much in a little over a month. Second question, if you go through the fundamental and the technical aspects of the stocks, find they are trending up, pass all of the tests, then wouldn’t these be stocks be ones that you would buy and hold, as opposed to selling covered calls. Right now with what I just saw on my LULU and CRM stocks – going back they would have passed the fundamental and technical tests.

Wouldn’t it make more sense to find a stock that is in a sideways pattern?

Any help would be appreciated.

Thanks
Patti

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By: Jay https://www.thebluecollarinvestor.com/converting-non-dividend-stocks-into-dividend-stocks/#comment-193305 Mon, 21 Jan 2019 15:56:58 +0000 https://www.thebluecollarinvestor.com/?p=17456#comment-193305 In reply to Alan Ellman.

Pat,

Another consideration when you own 2000 shares of a probable growth stock like SIRI is simply cover less of it. You could write 20 contracts a month or you could write maybe 10, pick a number, and let the rest run.You can also ladder your strikes selling some ITM to guard against down moves and some as far out of the money as there is premium enough to make it worthwhile.You have all sorts of flexibility when you have that many shares! I try to have at least have 200 shares of any stock or ETF so I can cover half and let the other half run in normal markets, for whatever that is worth :)?

Alan,

Thanks for another great blog article, as always! To your point I suspect few people think of gold as an income investment? I do. I have held a GLD position for years as portfolio diversification and overwrite it consistently for monthly cash flow. Certainly no earnings report or dividend risk on that one :). – Jay

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