7 November 2023 Covered Calls Trades Are Yielding 13.3%

Donald E.L. Johnson - Stock Picking, Options Trading for Income - Mon Oct 23, 2023

By Donald E. L. Johnson

Cautious Speculator

Stocks continue to fall. That makes it hard to hold on to dividend and covered calls stocks. It makes a lot of investors want to sell and cut their losses short and take profits on their investments when they can.
When stock fall, volatility rises. Higher volatility generally produces higher options prices. That’s good for sellers of covered calls options.
For income investors, falling stock prices offer opportunities to buy good stocks when dividend yields are up. They can sell puts and calls at higher options prices and for more monthly income.
As stocks retreat, investors in dividend stocks and traders of covered calls and cash secured puts remain focused on generating a steady stream of dividend and options premiums income.

While we might cut our losses short on our speculative swing trades and even on so-called buy and hold positions, income traders continue to sell covered calls and cash secured puts at out of the money strikes as implied volatilities and the prices of the puts and calls we are selling rise.

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The assumption is that focusing on investing for income is more profitable and less risky than swing trading and buy and holding over the long term. That’s my assumption. But I can’t cite any research that backs up my opinion. So take for what it is worth to you and trade accordingly. I’m happy to be earning 10% to 15% annualized returns while the markets fluctuate.

There are risks staying down markets, and there are risks in getting out and then not getting back in. Cash is king, but being 100% in cash is a bit rash.

On October 20, I had 16 covered calls trades expire. I rolled six of the above covered calls trades into the November trades shown in the spreadsheet above before they expired. I knew they wouldn’t be called. Warning, I’ve been caught short a couple of times doing this. So be cautious.

All seven of the stocks, including Merck & Co. (MRK) , on which I sold covered calls back on Nov. 2, are looking as weak as most stocks do today. The seven stocks are down 13% from a month ago and down 26.7% from three months ago.

But their average annualized return on risk in terms of covered calls premiums is a nice 13.37%. Their average dividend yield is 1.64%.

With the expectation that over the long term I can generate good dividends and covered calls premiums on them, I’ll continue holding D.R. Horton (DHI) , General Mills (GIS) , MRK, Paycom Software Inc. (PAYC) , S&P Biotech (XBI) and Zimmer Biomet Holdings (ZBH)

Because the markets and stock prices are falling like knives, I chose to trade most of these covered calls at strikes that are near or a bit above their purchase prices and in some cases well above their net debit prices.

For example, GIS is trading at about $63.33. I bought it for $64.95 a share. It’s cumulative net debit is $60.97 after collecting dividends and options premiums for several months. I sold GIS 11.17.23 expiration $65 strike covered calls for an ARoR of about 19% with a potential gain of 0.08% if the stock is called at $65.

To date, the October covered calls are generating about a 17.31% ARoR plus average dividends of about 2.81%. On October 20, 16 of these options expired. I’ll roll most of these into November trades this week. ARoR assumes that replicating the above trades with similar trades that produce similar results can be done over the next 12 months. But monthly portfolio results fluctuate with stock prices like other equity investments as prices and trading decisions change.

Income traders usually take what they can get when it is time to roll options trades to the next week or month. But I may give the market a few days to settle down before I roll some of the recently expired trades. Each stock is different and has to be traded on its prospects and what its call options prices are doing.

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