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10 November 2023 Covered Calls Trades Update #1

Stock Picking, Options Trading for Income - Sun Oct 29, 2023

By Donald E. L. Johnson

Cautious Speculator

  • 10 covered calls trades are yielding annualized returns on risk of about 15%.
  • Sinking markets allow covered calls traders to use closer to the market strike prices.
  • These stocks pay average dividends and pretty safe dividends.

Ten covered calls options trades that expire in November are yielding options premiums income at an average of 1.12% per equity, or 15% annualized. The average annual dividend yield on those stocks is about 2.08%.

The 32 October expiration covered calls trades yielded options premium income of 17.85%. The average dividend yields on those stocks is about 2.72%.

Please click on images and zoom in for better views.

Last week I sold covered calls on Bunge Ltd. (BG)  and Duke Energy Corp. (DUK) . The other eight stocks are D.R. Horton (DHI) , General Mills (GIS) , Coca-Cola Co. (KO) , Merck & Co. (MRK) , Paycom Software Inc. (PAYC) , S&P Biotech (XBI)  and Zimmer Biomes Holdings (ZBH) 

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This week I’ll roll five covered calls that expired on Oct. 27 into November expiration options. They include Amazon.com Inc. (AMZN) , Campbell Soup Co. (CPB) , Pfizer Inc. @PFE, Walgreens Boots Alliance (WBA)  and Intuitive Surgical Inc. (ISRG) .

With stocks correcting, some traders will trade covered calls that are closer to current stock prices, or at the money. But investors with stocks under water, as most dividend stocks are, the risk is that with the VIX over 21 and a lot of stocks at or near over sold conditions, the market could snap back overnight.

At the moment, pre-market futures point to a slightly positive Monday opening/

On a snapback in stock prices, most covered calls traders don’t want their covered calls to be exercised that leave them with realized losses.

To avoid that, the tactic is to trade covered calls at strikes that are as deeply out of the money as possible while generating a decent return on risk. Low risks produce low returns and higher risks produce higher returns.

For example, when I sold BG 11.17.23 $115 covered calls, the stock was at $103. The chances that BG will be called at the $115 strike is about 18% in a bear market. So I didn’t feel I had to sell BG calls at a $120 strike, or the price I paid for the stock. The cumulative net debt on BG after collecting dividends and options premiums, is $109.75. Because I’ve been covered calls on BG and collecting dividends, if BG is called at $115, I’ll still make a profit on the trade even though it will be a tax loss trade.

DUK was $88.01 when I sold DUK 11.17.23 $90 covered calls on it. I paid $88.18 for the stock. The net debit is $84.70. This let me do a normal covered call trade that may give me a 2% gain and a nice 20.7% ARoR on the options trade. ARoR assumes that similar trades will bring similar results if future trades produce the same ARoR.

The average delta on these 10 trades is a pretty high 0.27. That means there is an average risk that the calls will be exercised is about 27%. Another way to look at it is the out of the money average of 74.9%. That shows that I was looking for lower prices when I did these trades. I may look for lower deltas this week.

All of the November expiration stocks pay dividends and the dividends look safe.

The stocks’ volatility is getting pretty high along with options prices. That is good for sellers of covered calls.

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On the date of publication, Donald E.L. Johnson had a position in: BG, DHI, DUK, GIS, KO, MRK, 0KGH.LN, XBI, ZBH, AMZN, CPB, PFE, WBA, ISRG. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.