Covered call writing can be crafted to meet a myriad of goals in a wide range of market conditions. In May of 2020, the 10-year Treasury Bond yield was 0.65%. Bank interest rates in several countries were negative. At the same time, dividend yield on Dow 30 and S&P 500 dividend-bearing stocks were triple that of the 10-year Treasury. I see this as an opportunity… a 3-income stream opportunity derived from share appreciation, option-premium and dividend capture.

 

3-income strategy in low interest-rate situations

Blue-chip stocks frequently are cash-rich and generate dividends on a quarterly basis. They have a long history of success and, in addition to the dividends, most have exchange-traded stock options associated with them. This proposed strategy consists of the following steps:

  • Buying a portfolio of the best-performing Dow 30 stocks
  • Selling out-of-the-money call options
  • Capturing corporate dividends
  • Managing our covered call positions

 

Stock selection

We select the top-performing Dow 30 stocks that have been out-performing the S&P 500 in both 3-month and 1-year time frames as shown in our BCI Blue Chip Reports.

 

Top-Performing Dow 30 Stocks for the June 2020 Contracts

 

Option selection

For this article, I used the first 5 stocks in the report and checked the option-chains for out-of-the-money strikes that generated 1% – 2% for 1-month initial time-value returns. I entered the option-chain information into the blue cells of the multiple tab of the Ellman Calculator.

 

Portfolio Calculations: 5 Stocks

 

The average 1-month return on the option was 2.3% with an additional upside potential average of 3.5%. The maximum 1-month return on this portfolio is 5.8% without exit strategies. On top of these income streams, we can add the dividend income offered by these companies.

 

Important dates

Ex-dividend date

In order to capture the corporate dividends, we must own the shares prior to and on the ex-dividend date. A free and reliable resource is:

www.dividendinvestor.com

 

Earnings report date

We should never have an option in place that expires after an earnings report date in a contract month. We should wait for the report to pass and then sell the call option or not use that stock until the report passes. A free reliable resource for ER dates is:

www.earningswhispers.com

 

Exit strategies

Once we have entered a covered call trade, we move to position management mode. A complete detailed discussion of exit strategies is beyond the scope of this article but all that information is found in my books and online video programs. These include:

  • 20%/10% guidelines
  • “Hitting a double”
  • Rolling-down
  • Selling the stock after closing the short call
  • Mid-contract unwind exit strategy
  • Rolling-out
  • Rolling-out-and-up

 

Discussion

In a low-interest rate scenario (can be used in others, as well) especially, we can set up a low-risk, 3-income stream strategy using blue chip stocks, out-of-the-money call options and dividend capture for each position. As always, the 3-reuired skills are essential for achieving the highest returns:

  • Stock selection
  • Option selection
  • Position management

 

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,

Outside the BCI Poor Man’s Covered Call Calculator, I don’t think there are any others I could find on the internet. I actually started to create my own but bought yours for 2 reasons… well yours was so much more detailed, of course, and also to check my own calculations. Your spreadsheet is simply at a whole new level!!

Thank you for your time and expertise. You have changed my life!!

Best,

Jonathan

 

Upcoming events

1.Wealth365 Summit

Tuesday January 19, 2021

10 Am ET

 

2.Long Island Stock Investors Group

February 9, 2021 at 7:30 PM ET

Zoom webinar- details to follow

 

3. AAII Research Triangle NC

April 10,2021 at 10 AM ET

Zoom webinar- details to follow

 

Alan speaking at a Money Show event

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Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.

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