The Stock Option Writer
© Warren Kaplan 2011-2012
April 3, 2012
The technology investment field is packed with land mines of new inventions. Even now, as you read this, there is someone in the world inventing the next greatest thing that human kind needs and wants. Which company, present and future will be the winner is totally unknown? How can you invest in this exciting environment without the risk of getting wiped out? Well, the answer is that you buy a basket of technology stocks that eventually drops the losers, harbors the winners and adds the new up and comers.
There are 79 companies in this ETF. The current largest holding is Apple followed by Microsoft and IBM. Turnover of the portfolio in the last 12-months was only 4.95%. The fund expenses are a mere .19%. The fund started on December 16, 1998 so you can be assured that it will be here a number of years. In the last 12-months the fund has gained 10.75% in value. The current annual yield is 1.6% and dividends are paid quarterly.
By writing cash covered put options, you can earn a far larger return on your capital than the 1.6%. You can write stock covered calls and enhance your returns too as well as reduce your ownership costs.
The stock (XLK) closed at $30.48 on April 2. The May 19, 2012 put at $30 can be sold for $.48. That is an annual yield rate of 9.6%, which is six times the annual dividend yield. And if the stock price goes down in the next few days, you will be able to sell the put option for much more. Keep in mind that you must really want to buy the stock at $30. If you feel that is too high a price in this market, you can sell the $29 put and for the May expiration, you will get $.24. That is an annual rate of 5.0%, which is a lot better than the current 1.6% dividend rate that a current buyer would receive. It should be noted that both of these scenes are strike prices that is below the current price, which affords some measure of protection. For example, if the XLK goes down in price below 29 on May 19, you will own the stock. Your true cost will be $28.76 and the $.49 dividend would give you a yield of 1.7% and of course you can then write covered calls.
An examination of the June options shows that you would receive $.74 for writing the $30 option and $.48 for the $29 options. The $30 option brings you an annualized return of 7.4% and the $29 option brings you a return of 5.0%. It should be noted that I expect the stock to be ex-dividend on June 15, a day before option expiration. However, the dividend is an estimated $.13.
If you are already long the stock, you can consider selling a covered call in order to enhance your income. For example, the May $32 call will bring you $.08, which would double your income rate and the stock will be above $32 in order for it to make sense for the buyer to exercise the option. You have to have a mind set that you would be willing to sell the shares at $32 by May 16, 2012. If you want more money, you can sell the June 16, 2012 $32 option for $.22. If the stock is not called away, you will get the ex-dividend income of approximately $.13 per share. If the stock is above $32 you can be very sure that the stock will be called away just before the ex-dividend date of June 15th. However, you can try to regain the stock by writing a put option at that time.
You need to work with a well trained and experienced option writer in order to help guide and direct you. You can enhance your yields if you use option writing properly. Keep away from margin. Leave the leverage to full time experts who are using their own money. Remember, technology is constantly changing.
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.”
Reader’s comments are welcome. Please do not consider these opinions as advice and we take no responsibility for any trades made. You should review these option writing ideas with your financial advisor so that you are properly guided. Writing options is not for everyone. If you want information about a certain stock, please email firstname.lastname@example.org.