By Warren Kaplan
The Stock Option Writer
© Warren Kaplan 2011-2012
January 24, 2012
Here is a great company that has been more than fair with its owners, the shareholders. The current annual dividend totals $1.46 and is paid out $.365 quarterly. Based on a closing price of $60.01, the annual yield is 2.43%. Based on history, I believe that the company will raise its quarterly dividend in 2012 by a modest amount. The yield is a lot better than what you can get in a cash account, about .30%. However, there are a lot of blue chips that pay a lot more in dividends. So, maybe it is time to take a profit. Maybe.
You could sell the $60 calls for March 17 and receive $1.35. That is almost how much Wal-Mart currently pays in annual dividends. However, we expect the stock to go ex-dividend around March 7 and you may miss a dividend of $.365. Conversely, if the stock gets called away from you, your obligation ends early by about 10-days. If you are even more bullish and willing to take the risk, you can sell the Wal-Mart March 17, 2012 $65 call and take in $.10. Don’t forget the ex-dividend date and the added money you will get. And, there is a good chance that Wal-Mart will raise their dividend this year.
Further out, you can sell the June 18, 2012 $60 call and take in $2.14, which is even more than the current dividend. Plus, you will get 2 dividends unless the stock is called sooner and your obligation ends sooner allowing you to redeploy the funds. The June 18, 2012 $65 calls can be sold around $.46. Unless the stock has a huge run up, you will get 2 dividends that will total at least $.73. So the premium will increase your yield by 63% for just 6 months. From the current price, which we can assume you have a nice profit, you will gain an additional 8.31% in just 5 more months, equal to 19.96% more money for you IF the stock is called away. Suppose it is not called away, well, the premium is always yours and so will be the dividends. You can then reassess the situation and you can sell a new call at a price you determine and for a time period you decide.
Looking out one year, I noted that the January 19, 2013 $60 calls will pay you $3.40, which is more than two times the current dividend. So, you will get the current dividend for one year, yielding 2.43% and the $3.40 will give you an extra 5.65% for a total of 8.08% on the $60 price. The January 19, 2013 $65 call will get you a premium of $1.45. That equals your current dividend giving you at least a 4.86% return. If the stock gets called away, you will gain an extra 8.13% for a total return of 12.99%.
You will have to be approved to write options at a level one (the entry level) and that is fairly simple. You need to fill out a bunch of forms. Remember that the objective is to raise your current income. This is not the way to protect a price level. One way to do that is to have a moving stop loss but that gets a bit complicated when you are selling covered calls. The basic idea behind covered call selling is to preset a selling price at which you think the stock is fully or over valued.
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 corp@opportunistmagazine.com.
