by Michael Shulman | September 17, 2013 9:58 am
Many option traders keep separate accounts – one for longer-term and income investments, and another for trading. Mistake number one.
Many option investors confuse selling covered calls with trading. Mistake number two.
Many of you are about to tune out because it appears I am not going to discuss a option purchase that can make you a billion dollars, restore the vigor of youth and enable you to buy a commercial FroYo machine for your woman- or man-cave (whatever, language sometimes gets in the way of being gender neutral).
Where was I? Oh, tripling your dividend and putting on a position that yields 20% or more in income.
The stock and position in question is Enerplus (ERF), a Canadian oil and gas outfit currently benefiting from high world oil prices. Eventually (2014?) it should benefit from major investments in shale formations in Pennsylvania.
ERF is one of my favorite energy plays and the stock is moving. In my service Income Edge I found it at $12 and just raised the buy-under to $18.75. Now the stock itself is trading around $17. The company pays dividends monthly and has a current yield of 6.3%.
Want to double, or possibly even triple that return over the course of a year? Take a look at selling the ERF January 2014 $18.00 call. You should get around $55 per 100 shares. Do this three times a year and you add 10% a year to the yield – well, maybe I exaggerated by calling it a triple play. On the other hand, I expect the stock to climb back to $22, so the whole position could yield far more than 20% in a year – if it hits $22 from here, the total profit is about a 45% return if you manage the position well.
Bored? Selling not your thing? Fine, consider buying the ERF September $17 calls. If you lose all your money, don’t blame me, I offered a shot at 45% a year and you turned it down. Got your attention? Then sell the ERF September $17 put. You could get $15 a contract, and this lowers your cost, generates some cash and sets you up later on to sell the ERF January 2014 $18 call.
Boring, but at least think about it.
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