Income investors are here, there and everywhere. Part of your portfolio is probably made up of some high-yield names – and few income investors use these stocks as platforms for options strategies to boost their income. That is a mistake. If you do not sell options against your high-yield names, you are leaving a lot of money on the table.
The most well known high-yield stock – and one that sees tens of thousands of contracts traded – is the mortgage REIT Annaly Capital Management (NYSE:NLY). It is a very good company with an 11.4% yield and a quarterly dividend of $0.45 for an annual payout of $1.80 per year. It went ex-dividend last week. But you can do better.
If you bought it now, it would cost you around $15.75 per share. You would then turn around and sell the July $16 call for around $0.30, or $30 a contract. Why a July call? Expiration is after the stock goes ex-dividend. You start life in the stock with some cash in hand – and here is what can happen.
Scenario One (30% probability): You get called out before you collect the dividend. You net $0.55 on a purchase price of $15.75, a 3.5% gain in less than three months and an annualized gain of roughly 14%, which is better than the dividend yield.
Scenario Two (60% probability): You don’t get called out and collect the dividend. You net $0.75 on your purchase price of $15.75, a 4.8% gain in less than three months and an annualized gain of roughly 20%. Much better than the dividend yield.
Scenario Three (10% probability): You collect the dividend AND you get called out. You net $1.00 on a purchase of $15.75, a gain of 6.35% in less than three months and an annualized gain of more than 25%. Yup, much, much better than the dividend yield.
I own NLY shares and sell calls. You should consider doing the same.
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