Whether we are selling stock options or buying stocks to accumulate dividend income, Blue collar Investors seek to generate cash-flow in a low-risk manner with capital preservation in mind. This article will highlight 1 way to combine selling cash-secured puts with dividend stripping.
What is selling cash-secured puts?
A low-risk option-selling strategy where the option seller agrees to buy shares at the strike price by the expiration date. The broker requires the seller to place a specific amount of cash into the brokerage account to secure that put sale and fund a possible future stock transaction. In return for taking on this contractual obligation, the option seller is paid a cash premium, the amount of which is dictated by the market.
What is dividend stripping?
This the practice of buying shares prior to an ex-dividend date (date shares must be owned in order to be eligible to receive the dividend), and then selling those shares on or after the ex-date. In the past, there were certain tax advantages to using this strategy, but those perks no longer exist.
Important fact regarding dividend distribution
Dividends are not free money. On the ex-date, share value will drop by approximately the dividend amount. Of course, there are many other factors that will influence share price on the ex-date but one of them is a deduction of the future dividend amount.
Proposed strategy
- Wait for a corporate earnings report to pass
- Sell an out-of-the-money (OTM) cash-secured put that expires prior to the ex-date and before the next earnings release
- Capture option premium
- If the put option is exercised, hold the shares through the ex-date to also capture dividend premium
Real-life example with WMT
- WMT had an earnings release on 2/17/2022
- The next projected earnings report was on 5/19/2022
- WMT next ex-dividend date was on 5/5/2022
- Check the put option-chain to generate a cash premium that will match the annualized dividend amount
- On 4/29/2022, WMT was trading at $153.16
WMT Earnings Release Date (www.earningswhispers.com)
WMT: 5/19/2022 Next Earnings Report Date
WMT Dividend Information (www.dividendinvestor.com)
WMT: 5/5/2022 Ex-Dividend date
The annual dividend premium is $2.24 per-share and that will represent our target premium for the OTM put sale. This represents a 1.45% annual yield.
WMT put option-chain on 4/29/2022
WMT: Put Option-Chain on 4/29/2022
The option-chain shows a bid price of $2.28 for the $152.50 slightly OTM strike. This aligns with our target of $2.24 per-share.
WMT put entries into the Trade Management Calculator
WMT: Put Initial Trade Entries
WMT initial calculations and trade structuring
WMT: Initial Put Sale Calculations
The unexercised return is 1.52% which aligns with the 1.45% annualized dividend yield. If the put is exercised, the purchase discount is 1.92% along with the capture of the quarterly dividend amount. The screenshot also shows exit strategy threshold price points. The strategy risk is when share price declines below the breakeven price point of $150.22.
Discussion
I have never been a huge proponent of focusing in on stock dividends. I view them as icing on the cake rather than a primary focus of our investments. However, there is nothing wrong with this approach and many of our members do enjoy the benefit of focusing in on dividend income as well. This article proposes a strategy where both option-selling and dividend income can be combined into a low-risk approach to dividend capture with opportunities to generate much more than dividend premiums. In this WMT real-life example, annualized dividend income can be attained with only 1 option sale and 3 additional opportunities possible.
Premium Member Benefits Video
This is a great time to join our premium member community with its stock screening and educational (over 200 videos) benefits. We offer more benefits than ever before. For information, click here.
For video explanation, click here.
Your generous testimonials
Over the years, the BCI community has been incredibly gracious by sending our BCI team email testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to share some of these testimonials in our blog articles. We will never use a last name unless given permission:
Hi Alan,
Thanks for your training videos and guidelines. They have been helpful to me. I sell a lot of covered OTM weekly options on my stocks holdings which include, AAPL, AMAT, GS, GOOG. I’ve incorporated many of your guidelines into my actions. I would like to move the strikes around from OTM to ATM or ITM depending on price market output. Also, I find effective exit strategies are essential to my success so I’m looking to reading your book which I just bought!
Greg P.
Upcoming events
1.Wealth365 Investor Summit
Thursday October 13, 2022
Using Both Covered Call Writing and Put-Selling to Generate Monthly Cash Flow
The PCP Strategy (Put-Call-Put or “wheel” strategy)
Hosted by:
Dr. Alan Ellman, President of The Blue Collar Investor Corp.
Barry Bergman, BCI managing Director
Selling stock options is a proven way to lower our cost-basis and beat the market on a consistent basis. Two such low-risk strategies are covered call writing and selling cash-secured puts. This presentation will detail how to incorporate both strategies into one multi-tiered option-selling strategy where we either generate cash-flow or buy a stock at a discount. I refer to this as the Put-Call-Put (PCP) Strategy, also referred to as the wheel strategy.
The basics and pros and cons are discussed as well as a real-life example and introduction into the BCI PCP Calculator. This seminar is appropriate for those who look to generate modest, but consistent, returns which will enable us to beat the market on a steady basis while focusing in on capital preservation.
2.Money Show Orlando live event
October 30th – November 1st, 2022
OMNI ORLANDO RESORT AT CHAMPIONSGATE
Visit Alan, Barry and members of the BCI team at Booth # 415
Sunday, October 30, 2022, at 5:00 pm – 5:45 pm EDT
Covered Call Writing: Multiple Applications Based on Current Market Conditions
Monday, October 31, 2022, at 4:30 pm – 6:30 pm EDT
Selling Cash-Secured Puts: Detailed Start-to-Finish Six-Part Program*
Masters Class
Comprehensive Course on Selling Cash-Secured Puts
Detailed start-to-finish 6-part program
This presentation will provide all the information, with real-life examples, necessary to master the strategy of selling cash-secured puts. The program is divided into 6 sections:
- Section I:
- Option basics
- Section II
- Traditional put-selling
- Section III
- PCP (wheel) strategy
- Section IV
- Buy a stock at a discount instead of a limit order
- Section V
- Ultra-low-risk put/Delta strategy
- Section VI
- Ultra-low-risk put/Implied volatility strategy
This presentation was developed to benefit both beginner and experienced option traders and will provide all the information needed to initiate the strategy and elevate returns to the highest possible levels.
45-minute presentation
Covered Call Writing: Multiple Applications Based on Current Market Conditions
Real-life examples with Invesco QQQ Trust (Nasdaq: QQQ)
Covered call writing is a low-risk option-selling strategy geared to generating cash flow with capital preservation a key requirement. This presentation will demonstrate how the strategy can be crafted to benefit in all market environments. Market situations highlighted are:
- Normal to bull markets
- Bear and volatile markets
- Low interest-rate environments
A popular large-cap technology exchange-traded fund, Invesco QQQ Trust, will be used to establish rules and guidelines to benefit in these market circumstances.
3. Money Show’s Post-Election Strategies Virtual Expo
November 10th -11th, 2022
Information & registration link to follow
***********************************************************************************************************************
Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.
****************************************************************************************************************
Premium Members,
This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor Premium Member site and is available for download in the “Reports” section. Look for the report dated 09/23/22.
Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them on The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:
http://www.youtube.com/user/BlueCollarInvestor
Reminder: Premium members are grandfathered into your current rate and will never see a rate increase as long as membership remains active.
Best,
Barry and The Blue Collar Investor Team
[email protected]
Alan,
After hitting a double or rolling down, do we set the buy to close 20/10 orders based on the old or new option price?
Thanks,
Dennis
Dennis,
After executing an exit strategy and re-selling an option, the BTC limit order is set based on the new option premium. Below is a screenshot of a double I hit Wednesday with 4 contracts of XLE.
The original option was sold at $1.85 with a 20% ($0.37) BTC limit order executed. I the resold that same strike at $0.58 and set a BTC limit order at $0.12, 20% of $0.58. I used 20% because we are in the 2nd week of a 5-week contract.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan
Premium members:
This week’s 4-page report of top-performing ETFs and analysis of the top-performing Select Sector SPDRs has been uploaded to your premium site. One and three-month analysis are included in the report. Weekly performance has also been incorporated into the report although not part of the screening process. Weekly option availability and implied volatility stats are also incorporated.
The mid-week market tone is located on page 1 of the report.
New members check out our ongoing and never-ending training videos (“Ask Alan” and Blue Hour webinars). We add at least one new video each month. Only premium members have access to the entire library of these training tools.
Reminder: Premium members are grandfathered into your current rate and will never see a rate increase as long as membership remains active.
For your convenience, here is the link to login to the premium site:
https://www.thebluecollarinvestor.com/member/login.php
NOT A PREMIUM MEMBER? Check out this link:
https://youtu.be/EXMO-KwZuJs
Alan and the BCI team
Hi Alan
I have another question about the TMC.
In situations where you hit a double or triple (in a single month) – how are these entered in the TMC if it only allows you to enter a one Exit Strategy/BTC entry?
Hope this makes sense.
Thanks in advance,
Lovelle
Lovelle,
It sure does make sense and is an important accomplishment of the TMC spreadsheet.
When multiple exit strategies are executed in the same contract cycle, we need to enter the additional strategies by adding more rows to the same-security trades.
As an example, initial trade + exit strategy #1 will go on 1 row and then exit strategy #2 on a new row during the same contract cycle.
When this occurs, the spreadsheet will calculate additional capital invested although it is the original capital we are using for the 2nd exit strategy and perhaps a slight bit more.
This is where the “capital adjustment” section of the spreadsheet comes into play. By accurately accounting for the actual cash invested for these trades, the spreadsheet will give us reliable initial and final return percentiles.
For detailed information on these entries, see Chapter 26 in my new book, “Exit Strategies for Covered Call Writing and Selling Cash-Secured Puts”, pages 139 – 146.
Alan