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How to Create 3-Income Producing Portfolios Using Covered Call Writing and Dividend Generating Stocks

Covered call writing is a low-risk cash-flow strategy that can also create the potential of a 2nd income stream when using out-of-the-money (OTM) strikes which can also produce potential income from share appreciation. When incorporating underlying securities that offer dividend distributions, we now have a strategy with 3-income potential sources: option premium, share appreciation and dividend distribution.

Strategy analysis

  • Purchase top-performing blue chip stocks
  • Re-evaluate bullish assumption monthly (or weekly)
  • Capture quarterly corporate dividends
  • Sell out-of-the-money covered calls

–Call premium

Share appreciation potential

  • 3 potential income streams per stock

Stock selection (BCI Blue Chip Report as an example)

Blue Chip (DOW 30) Report for March 2023 Contracts

  • The red and blue arrows show these securities outperforming the S&P 500 over past 1- and 3-month time-frames
  • The purple arrow shows the dividend annual yield
  • The green circle shows key dates to avoid, earnings and ex-dividend dates

30-day initial time-value returns with upside potential when using OTM call strikes

Initial Calculations Using the BCI Trade Management Calculator

  • The initial time value 30-day returns range from 1.56% to 2.14%
  • Annualized returns range from 19.00% to 26.02%
  • Upside share appreciation potential ranges from 1.75% to 3.67%
  • These calculations do not include the dividend yield aspect of this 3-income strategy

Dates to avoid

  • Earnings reports: Okay to own the stock through the report and write the call after the report passes
  • Ex-dividend dates: Do not have an option in place that expires after the ex-date. Ex-dates are the most common reason for early exercise
  • Use weekly options (when available) to circumnavigate around earnings and ex-dividend dates

Discussion

Covered call writing using OTM strikes on dividend-bearing stocks is a reasonable approach to developing portfolios with 3-income stream per trade potential. This article featured using the best-performing Dow 30 stocks with OTM monthly call strikes, one of many ways to structure such portfolios.

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:

Dear Alan:

Hi Alan,

I used the CEO strategy for the April contracts with fantastic results. A total of $3364 in profits for the month!  I could have done better but I decided to go with mostly ITM calls for some downside protection.

This is a fantastic strategy as it really simplifies the setups as well as the exit strategies.

Thanks again!

Bruce

Upcoming events

1. Orlando Money Show Live Event

45-minute workshop: Monday October 30th 2:10 PM ET – 2:55 PM ET

Selling Cash-Secured Puts and Strategy Choices After Exercise

2-hour Master’s Class: Tuesday October 31st 9:30 AM ET – 11:30 AM ET

How to Master Covered Call Writing:

A detailed start-to-finish analysis using real-life examples.

2. AAII Orange County, California Chapter

Saturday November 11, 2023

Details to follow.

Alan speaking at a Money Show event**********************************************************************************************************************

About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

8 Responses to “How to Create 3-Income Producing Portfolios Using Covered Call Writing and Dividend Generating Stocks”

  1. John July 22, 2023 12:44 pm
    #

    Alan,

    I made some great choices using the premium report . Jets stands out. Very profitable.

    Have a great weekend
    John

    • Alan Ellman July 23, 2023 8:15 am
      #

      John,

      Yes, during earnings season, we frequently turn to heavier ETF positions which do not report earnings.

      JETS has frequently earned its way onto our premium member watch lists over the years and is currently on the list.

      Current data for the near-the-money $22.00 strike, shows a weekly initial time-value return of 1% and 2% for the 1-month initial return.

      I, typically, wait until about 11 AM ET on Monday morning to confirm the bid-ask spreads as market makers want to see market direction before establishing firm spreads that will be favorable to our trade executions.

      Alan

  2. Barry B July 22, 2023 11:06 pm
    #

    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 07/21/23.

    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:

    https://www.youtube.com/user/BlueCollarInvestor

    Reminder: Premium members are grandfathered into your current rate and will never see a rate increase as long as the membership remains active.

    Best,

    Barry and The Blue Collar Investor Team
    [email protected]

  3. Vivek July 24, 2023 1:02 am
    #

    Hi Alan,

    I am a big fan of your videos. I have a question on the strange option action on UPST for OTM Strikes. Is this because of high Short Interest and their eagerness to cover their positions?

    Regards,
    Vivek

    • Alan Ellman July 24, 2023 6:43 am
      #

      Vivek,

      UPST is a security with an extremely high implied volatility (IV) and equally high open interest of most strikes, both ITM and OTM. It is not a security that is appropriate for most retail investors, as it relates to option-selling of calls and puts. High IV translates to high risk to the downside.

      Here are some stats:

      The current mean IV of UPST is about 153, compared to 11 for the S&P 500.

      UPST is up 5-fold since May of this year ($9.50 to the current $54.00).

      In October 2021, UPST was trading > $300.00 per-share. This will explain, in part, why there is so much high open interest in deep OTM strikes. I agree with you that hedging short positions is part of the equation.

      As a result of this extremely high IV, we can generate an initial 1-month time-value return of about 15.9%, 191.6 annualized, based on pre-market option-chain stats.

      Bottom line: UPST is a highly volatile security which generates huge premiums and has caught the eye of option traders. Those of us who use covered call writing and sell cash-secured puts must decide if such a security aligns with our personal risk-tolerance and strategy goals. It will be appropriate for some and inappropriate for most retail investors.

      Alan

  4. Alan Ellman July 26, 2023 5:05 pm
    #

    Premium members:

    This week’s 4-page report of top-performing ETFs has been uploaded to your premium site. The Select Sector SPDR section is now crafted to align with our streamlined (CEO) approach to covered call writing. The report also lists Top-performing ETFs with Weekly options, mid-week market tone as well as the implied volatility of all eligible candidates.

    Premium member video link:

    https://youtu.be/EXMO-KwZuJs

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

    Alan and the BCI team

  5. Marsha July 27, 2023 2:54 am
    #

    Alan,

    I want to get your opinion about a trade I made yesterday with msft. After earnings, msft dropped about $15 to $334. I wouldn’t mind owning this stock so I sold the $325 put that expires tomorrow for $1.03 per contract. That’s a .318% 3-day return, 39% annualized.

    Msft came back a little towards the end of the day and exercise appears unlikely.

    Do you like this trade?

    Thanks for all you do.

    Marsha

    • Alan Ellman July 27, 2023 6:36 am
      #

      Marsha,

      I have 3 comments, including 1 minor correction.

      1. I love the trade. A well thought out plan to generate cash flow leveraging our knowledge of options in a low-risk manner.

      2. The key statement that made this trade a “no-brainer” is that you wouldn’t mind owning MSFT, if exercised.

      3. The annualized stat is a bit exaggerated. Annualizing 3-day trades includes weekends which we can’t take advantage of. A more accurate calculation would be to multiply the trade by 52 (weeks), resulting in an annualized return closer to 17% … still a wonderful result.

      Keep up the outstanding work.

      Alan