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Selling Warner Bros Discovery Out-of-the-Money Covered Calls Can Provide a Good Yield

WBD stock - Selling Warner Bros Discovery Out-of-the-Money Covered Calls Can Provide a Good Yield

Source: Jimmy Tudeschi /

Warner Bros Discovery (NASDAQ:WBD) formed last week when WarnerMedia, a spin-off from AT&T (T) merged with Discovery Inc. However, WBD does not pay a dividend yet. AT&T shareholders are likely not very happy with this. For every 100 shares in T stock, they received 24 shares of WBD stock. But that is not all.

After all, AT&T has now cut its dividend from $2.08 per share to just $1.11 per share. As a result of both the spinoff and the dividend cut, AT&T’s price has fallen from the mid-$20s to $19.52 as of Friday, April 22. That means AT&T investors have suffered a loss in principal (not including the WBD shares they have) and also a loss in income.

However, AT&T shareholders and others can create income by selling out-of-the-money covered calls with WBD stock. This is not that difficult to do. Most brokerage firms will allow investors to begin selling covered calls, assuming they do some basic research and can get basic level 3 approval for options. WBD stock now has some attractive opportunities.

Sell Covered Calls for WBD Stock

As of Monday, April 25, WBD stock is at $20.23. The June 17 call option contract allows investors to receive approximately 65 cents at the midpoint for every 100 shares that are sold at an exercise price of $25. Therefore, the yield earns an investor who sells the covered call  just over 3.0% (i.e., $0.65/$20.23 = 3.21%). Since the call option expires in about 2 months, the annualized yield is about 19.0% (i.e., 6 x 3.21%). This does not include any compounding effect.

Obviously, there are some risks here. If WBD stock rises above $25, you sell at $25 and miss out if the stock rises above $25. To get around that you might be willing to accept less risk and short sell your shares at a higher exercise price, like $30.

For example, the June 17 $30 WBD calls sell for 19 cents in the mid-price. That provides a yield of just under 1% (i.e., 0.92%) – i.e., $0.19/20.23. If you do this six more times in a year, your uncompounded yield return will be 5.52% (i.e., 0.92% x 6). This is close to the actual dividend yield that AT&T stock now has at 5.69% (i.e., $1.11/$19.52).

4-22-22 - WBD stock - June 17 Calls
Click to Enlarge
Source: WBD June 17 Calls -Yahoo Finance - Graphics adj. by Mark R. Hake, CFA

Moreover, the covered call seller of WBD shares gets to receive any upside in the stock up to $30, which is $5 more than the $25 strike price covered call.

Therefore, WBD shareholders can create some income similar to the income they lost from AT&T. Selling-out-of-the-money covered calls for WBD stock they own, provides a convenient way to provide this extra income.

On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Mark Hake writes about personal finance on, and

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