By Warren Kaplan
The Stock Option Writer
© Warren Kaplan 2011-2014
March 1, 2016
The dead and boring stocks we have accumulated by being put shares have been turning into Cinderellas. We bought T below $31, VZ below $46, ED below $62 as well as all of the closed end muni bond funds that we quietly accumulated from the cash we received for selling puts, have all turned into gold. Add in the fact that DDD reported that fourth quarter sales exceed $180,000,000 against the Wall Street estimate of $160,000,000 and the stock has moved from $8.00 to $10.00+ has made my life easier and richer.
What I have been doing is selling covered calls at higher strike prices. The premiums are less than what I could have gotten if I picked a lower strike price. However, when I sold puts, I sold them at a strike price that I was really willing to pay for stock. When I received the premium, my true cost was even less than the strike price, So when I allowed myself to get put T at $31.00, by taking in a $.50 premium, my true cost was $30.50. I have since sold T calls at $38 and $39 for roughly $15.00 per contract and if those calls expire worthless, I will sell new calls with strike prices of $39 and $40 and continue to take in more premiums and depending on the expiration date, I may get more dividend income too.
Today February 29, the stock market has been working its way down in spite of higher oil prices. I have decided to buy more shares of PFE (Pfizer) and I have been selling puts at $29.50 and at $29.00 with an expiration of March 11, 2016. If I make the sale of the puts at the price that I want, my potential annualized return, if the puts expire worthless, is in the 13+% area. If I do get assigned the shares, I can sell a covered call. There is another strategy that I can effect, which is to buy back the put I sold and sell a new put that is further out in time. I always do that for an additional credit that lowers my potential cost of the stock. This maneuver is called a spread and is best done by a professional trader as most brokers do not know how to correctly do this. I just sold put options on PFE with a $29.00 strike price for $.17 per share that expires March 11, 2016. My annual rate of return is 14.88%. PFE pays an annual dividend of $1.20. The dividend yield is 4.16% and I am in a position to sell a covered call at $30 giving me a premium plus a capital gains potential of 3.33% within say 30 days. I expect the next ex-dividend date for $.30 a share should be around May 3, 2016.
Understand that I do all this trading full time. I go from bedroom to office in 7 seconds. I spend very little on clothes. When I go on vacation or travel for business, since I am an option writer, the passing of time is on my side and reduces my risk. Keep in mind that I have been doing this for 66 years so I have survived good and bad markets. I do have to watch my weight as I get very little exercise during the day but that is offset by joining and going to a gym.
The very best long term buy you can make in your 401K is SDY. The ETF consists of companies selected from the S&P 1500 that have raised their dividend every year for at least 20 years (1996). When you buy shares of SDY, be sure to set up the dividends as a DRIP. That allows SDY dividends and capital gains to be automatically reinvested without commissions. Also, you will end up receiving fractions of a share, which still get dividends. If a company does not raise its dividend within a calendar year, the stock is dropped out of the fund. This happened in 2009 to Pfizer, General Electric and Pitney Bowes. I consider SDY to be basic for all investment portfolios. There are options available but the option market is not very liquid. Heck, the options are very ill-liquid. For example, the March 18, 2016 put options with a strike price of $71 are quoted $.05 bid and $.50 offered and only 3 contracts are open. The last price the option traded at is $.78 per contract. The other long-term ETFs I use to insure my future income is SDIV and DGRW. I will let you do your own research on those issues. I will say that those 2 funds pay a monthly dividend. I have found options on those two stocks to be even less liquid than the options of SDY.
If you have a passive approach to stocks and investments, you can write long-term options. Do avoid the get rich quick schemes as well as when someone tells you that a certain investment in a private company is going to be the next Apple or Microsoft or Google. Never, never, never borrow money to buy stocks or investments. Remember that a mortgage is a loan and you are borrowing money. You can watch American Greed on CNBC and see all the different ways that con artists will take your money.
Note that 1 option contract consists of 100 shares of stock.
Warren 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.