Home Articles Options Writer Series — Not All Companies Are Tied Into China

Options Writer Series — Not All Companies Are Tied Into China


stock-dividendsBy Warren Kaplan

The Stock Option Writer

© Warren Kaplan 2011-2014

January 12, 2016

The American stock market is going the wrong way and even the stocks of unaffected companies have seen selling.  This always causes panic and selling shares for the wrong reason.

First, you need to ask yourself why you bought a stock. I own AT&T (T) for income. Here is a company that has increased its dividend every year for the last 30+ years. The increased dividend survived the crash of 1987, 1992, 2002, 2009 and the volatility of today. So Friday it closed at $33.54 and yields 5.72%. Certainly, this belongs in your portfolio for stability, reliability and a steadily rising dividend. The stock is included in the ETF, SDY.  I have continually been selling out of the money calls with strike prices of $37-$39 and keeping the expiration date under 90 days. The premiums are not very large but frankly I do not want to lose the stock even at those levels. If the stock price gets to $35-$36, I would look to write call options at $39-$40.  Keep in mind that I bought the stock because I wanted the dividend income and the safety that says that the company is not a risk.  I have been selling puts at $33, short term and I have been continuing to take in more premium.  If the stock dips to a shade over $33, I would then write put options at $32.50 and call options at $36.00.  Oh, I forgot to mention, AT&T has nothing to do with China or oil/gas or currency problems or Russia or Iran or who becomes the next president of the United States.

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What I think of, as a companion to AT&T (T) is Verizon (VZ).  This is not an SDY stock because the company has not raised its dividend every year for the last 25 years.  However, it has the same safety factors as VZ has nothing to do with China or oil/gas or currency problems or Russia or Iran or who becomes the next president of the United States.  At $44.83, the current dividend yields 5.04%. I have been selling short calls at the strike prices of $50-$52.50. Here again, the premium is small but what I get does add to my income.

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The point I am trying to make is that you need to remember why you bought a stock. The market price is really not important as long as the company is paying out the dividends that you expected.  If you own 100 shares of T and the stock price is $40 or $30, you still have 100 shares and the stock is still paying a dividend that you expected. This is like the housing crash. The value of my house went up and down and up again. It never mattered to me because I bought the house to live in and not as a trading vehicle. What happens in China and oil/gas does not affect my living in the house. In the same way, the up and down of a stock should not matter to you if you expected and received dividend income.  You bought 100 shares and you still have 100 shares.

Another long-term favorite of mine that I write options on is Con Edison (ED). This is another SDY stock having raised its dividend for at least 25 years. The stock price is $66.43 and the dividend yield is 3.91%. I expect another increase in its dividend to be declared this month around the end of this week. I think the $.65 quarterly dividend will be raised to $.67.  I have been selling puts at $60.00 and selling calls at $70. 00.  In the future, I may sell calls at $72.50 - $75.00.  Utilities are not affected by China etc. but are affected by the cost of oil/gas.

The stock market is very volatile but remember why you bought a stock and what the function of your portfolio is. At this point, your investment manager is spending time to help you not to panic and to stay on your longer-term objective.  You should suggest that they make use of selling options to enhance income that the portfolio generates.

warrenkaplanWarren Kaplan has been writing options for 50 years. He has been a stockbroker, investment banker and brokerage owner.  He currently owns and operates Kaplan Asset Management, a provider of financial assistance for small to middle market businesses. He has more than a half-century of experience in dealing with financial markets, giving guidance and consulting with management, and assisting in the development of business strategies and solutions. The Company has assisted and consulted many successful companies, such as Natures Bounty (NBTY) and Action Products International (APII), helping them to go public and trade on the NASDAQ stock exchange. His philosophy is to “do something with the profits.” “If you make $100 in the stock market, take 50 percent and invest it back into the market. Then, take the other 50 percent and buy yourself something.”

Additional disclosure: I am not a registered investment adviser and I do not give investment advice. Nothing in this article should be construed as investment advice. Investors are encouraged to do their own research and seek the advice of an investment professional before investing. Writing options is not for everyone.  This article was written for informational purposes only.