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27 October 23 Covered Calls Options Trades Update #1

Stock Picking, Options Trading for Income - Tue Oct 10, 2023

By Donald E. L. Johnson

Cautious Speculator

  • October covered calls trades are yielding about 17.8% annualized in options premiums and an average of 2.5% in annual dividends.
  • More important than percentage returns is the monthly options premiums and dividends income generated by these trades for each investor.
  • Covered calls trades on Duke Energy and Verizon are explained.
  • Trading covered calls is risky. Trading stocks is risky. Trading covered calls is relatively simple and easy to learn. That helps equity investors manage their risks.

Annualized options premiums returns on 27 covered calls options trades that expire in October are averaging about 17.8%.

My spreadsheet shows my 27 trades on 22 equities.

Covered calls options are being traded weekly on Amazon (AMZN) , Dollar General (DG) , Kimberly-Clark (KMB)  and Intuitive Surgical (ISRG)  because weeklies generally offer higher returns than monthly and longer duration call options.

Four of the 22 equities have Barchart.com buy ratings. They are AMZN, Bunge Ltd. (BG) , Visa Inc. (V)  and S&P 500 Consumer Discretionary ETF (XLY) . The rest have sell ratings.

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The Trend and 50-day moving average columns are all sells. A lot of these equities are dividend stocks that I’m hoping to buy starting positions in while their prices are correcting. Some are stocks that I’m bottom fishing and nibbling at with small trades. And some are just good stocks that I’m writing out of the money call options on every month for options premiums income.

I expect that sooner than later most of these equities will be “buys”. The plan is to keep collecting puts and calls options premiums and dividends on these trades until their net debit prices are less than their market prices. The assumption and hope is that the stock prices will rally to meet the net debit prices. As the net debits shrink, the dividend yields and options premiums returns on invested capital will rise.

The in the money covered calls trade on Duke Energy Corp. (DUK)  doesn’t look like it will work out as planned. It looked like it would be called at the $85 strike price, leaving me with a loss on the stock but a small profit on the covered call trade. So I bought the DUK 10.20.23 $85 covered calls back. That trade provided a 0.79% return on risk, or 28.98% annualized if the same kind of 10-day trade could be done 37 times in the next 12 months.

After the DUK 10.20.23 $85 strike calls trades were closed, they were replaced by DUK 10.20.23 $90 strike covered calls. If those calls are exercised, the AROR will be about 20.7%. The potential gain on this 11-day trade is 2.07%, or about 68% annualized if the same gain is realized 33 times in the next 12 months.

DUK’s annual dividend on its cumulative net debit of $85.90 per share is 4.77%. The taxable equivalent is higher in an IRA or other tax sheltered account depending on the trader’s federal and state effective income tax rate.

Today I bought Verizon Communications Inc. (VZ)  for $31.48 and sold VZ 10.20.23 $31.50 covered calls for $0.49 a share, or $49 on a 100-share calls option contract. The ARoR on the 10-day trade will be about 56.81%. I also sold VZ 10.20.23 $31 strike cash secured puts for $0.20 a share, or $20 per puts option contract. The ARoR on this trade will be about 23.1%. VZ pays an 8.6% dividend on this trade’s net debit of $30.80. Net debit is the $31 strike price minus the 20 cents option price.

VZ’s point and figure chart on Stockcharts.com has a bearish price objective of $27.90 a share. If I can collect covered calls and puts options premiums and the $2.66 per share annual dividend on VZ for a year, the net debit will be below the $27.90 price objective. On Barchart.com, VZ is a 100% sell. Analysts are bullish on the stock. The high analyst’s target price on VZ is $64, the mean target price is $42 and the low target is $38, which is way above the current price of $31.76.

Morningstar.com rates VZ at five stars and gives it a fair value estimate of $54. Valuentum.com’s FVE is $36, which is about 13.5% above today’s closing price of $31.76.

The implied volatiles of these equities are fairly high. The higher the implied volatility and the IV rank, the better the options prices are for sellers of cash secured puts and covered calls.

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On the date of publication, Donald E.L. Johnson had a position in: AMZN. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.