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3 Covered Calls to Squeeze Dividends Out of Thin Air

Use covered calls to create synthetic dividends on these three tech stocks

By Tyler Craig, Tales of a Technician

In a low-interest rate world, income-seekers have to get creative. Plopping your dough in a savings account to score 3% annual interest is a thing of the past. Some say it may be a thing of the future, but what about those seeking income now?

3 Covered Calls to Squeeze Dividends Out of Thin Air
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Many investors find their way into the stock market with an eye toward cash flow. They gravitate toward dividend-paying stocks like utilities, telecoms and real estate investment trusts. But what if you’re a tech stock lover or have your eyes on a lovely little security that lacks a dividend? Are your chances for cash flow blown to smithereens with such investments?

Fortunately not. All you have to do is embrace a beautiful little option strategy known as the covered call. It essentially allows you to get paid for a promise. Someone will pay you (typically anywhere from 1% to 3% a month) for your willingness to sell your stock at an agreed upon price. If your stock doesn’t rise to the agreed upon price, you get to keep your shares and the initial money you were paid. If the stock does rise to the agreed upon price, you’ll have to part with your shares, but you capture a tidy profit.

Check out these covered call ideas on a trio of popular tech stocks that don’t pay dividends.

Dividends With Covered Calls: Facebook (FB)

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Source: OptionsAnalytix

Facebook Inc (NASDAQ:FB) has delivered gains galore to shareholders in recent years. Really, those looking for income have had little reason to complain about FB stock’s lack of a dividend. But what if you want to have your cake and eat it too? Is there a way to participate in part of Facebook’s upside, but also score income along the way?

Of course. With FB currently trading at $135.60, let’s say you’re willing to obligate yourself to sell the stock at $140 between now and April expiration: You could sell the April $140 call for $2.45. You would sell one contract for every 100 shares of FB stock you own. The $2.45 of income generated per share translates into a potential cash flow of 1.8% for the next two months.

It’s not jaw-dropping, but it’s something. Plus, you can make another $4.40 on the stock before you have to sell it. So all, told we’re looking at a max potential reward of $6.85.

Dividends With Covered Calls: Adobe (ADBE)

Click to Enlarge
Source: OptionsAnalytix

Like its predecessor, Adobe Systems Incorporated (NASDAQ:ADBE) has been on a tear of late. Once again, it’s hard to complain about the absence of quarterly dividends when your stock is tagging new all-time highs month after month.

But if you think Adobe’s ascent will slow in the coming months as it takes a well-deserved breather, then why not score some income in the meantime? With ADBE stock perched at $119, you can sell the April $120 call for $3.50.

By promising to sell the stock at $120 you will score about 3% of income for the next two months. That translates into about 18% on an annualized basis. That’s a rate of return income-starved investors should be salivating over.

Dividends With Covered Calls: eBay (EBAY)

Click to Enlarge
Source: OptionsAnalytix

Our final non-dividend paying tech stock is eBay Inc (NASDAQ:EBAY). Like the rest of the citizens of stock land, EBAY is basking in all-time highs right now.

With the stock a bit extended, don’t be surprised to see some backing and filling during the weeks ahead. Rather than ride out the chop with nothing to show for it, how about we generate some “dividends” on this tech stock by selling a covered call?

With EBAY perched at $33.80, you can sell the April $35 call for 72 cents. That 72 cents of potential income translates into a 2% return for the next two months. If EBAY remains below $35, then the option will expire worthless, allowing you to pocket the entire 72-cent premium. Then you can consider selling another covered call for May. If the stock sits above $35 at expiration, you will be required to sell your shares, but will capture another $1.20 in the stock, plus the 72 cents of premium for your troubles.

That sounds like a win-win.

At the time of this writing, Tyler Craig had no positions in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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