Dividend investing often gets labeled as boring, but savvy investors know there’s more to it than just sitting back and waiting for checks to arrive. With the introduction of options trading—especially strategies like selling covered calls—investors can substantially boost their profits on dividend stocks.
According to Barchart, using the Covered Call tool on dividend-paying stocks like Coca-Cola can lead to additional earnings by compiling premiums from options sales during ownership. By carefully managing these options, investors can create repeatable income streams, particularly from well-established stocks known as Dividend Aristocrats or Dividend Kings.
So, how can you tap this strategy for the best return? Let’s explore the steps you can take with Barchart’s Option Screener tool to find ideal candidates for your covered call strategy.
First, navigate to Barchart’s Covered Call Option Screener. The resulting page will display the default list of covered call trades, showcasing pertinent details such as premiums, strike prices, and expiration dates. From here, it’s best to focus on dividend stocks of the highest quality, so adjusting filters is necessary. Targeting Dividend Aristocrats (who have raised dividends for 25 consecutive years) or Dividend Kings (those who have raised dividends for 50 consecutive years) can offer peace of mind when selecting stocks.
For example, investors can apply specific filters to refine results: setting the bid price filter to $1 ensures the minimum premium available and adjusting the out-of-the-money (OTM) probability filter to over 70% maintains the likelihood of the option expiring worthless—essential for avoiding assignment.
After customizing these settings, the filter yielded promising results for Target Corporation’s stock (TGT). Here’s how the opportunity unfolded: purchasing 100 shares at $127.39 totals to $12,739. Writing a $140-strike call option for $2.06, which totals $206 premium, with expiration coming up shortly on March 7, provides appealing short-term income. With 77.83% probability of the option expiring out of the money, investors stand to keep both their shares and the collected premium.
Notably, if TGT remains below $140 at expiration, the call expires worthless, allowing investors to sell another call option afterward. This continual rolling of positions helps to maximize income streams without parting with the underlying shares. And just because options trading can sound intimidating doesn't mean it has to be; as explained by the experts at Barchart, proper management can mitigate risks effectively.
Each successful trade could yield strong annualized returns. For example, should each 10-day trade capture $206 without assignment, annualized returns could soar beyond 427.2%—a compelling figure for any income investor!
After the expiration, investors will naturally find one of two outcomes: the stock could either be above or below the chosen strike price. Ideally, the latter ensures the option expires worthless; if the stock price nears the strike price, proactive measures can be taken to close positions with buy-to-close orders at minimal costs. This position rolling keeps the potential to maintain shares intact.
It’s also important to note the mechanics at play when assignation occurs: typically, if the options hit their respective strike prices at expiration, shares will be called away. It may be less than ideal, but investors can still enjoy profitability from the premiums collected and the stock appreciation achieved prior to assignment. Those who bought TGT at $127.39 and received the $2.06 premium will see their investment yield fruitful returns.
At the end of the day, selling covered calls on dividend stocks not only provides the security of regular dividends but also enhances your income potential through the appropriate crafting of options strategies. Understanding how to implement these effectively, such as rolling positions or avoiding assignment, becomes key to smart investing.
While dividend stocks typically evoke thoughts of stability and slow growth, integrating options strategies can transform them completely—offering daily engagement, flexible income purchasing, and reduced risks.
So if you hold strong dividend stocks, employing covered call strategies can open doors to achieving high capital gains potential and regular cash flow diversification. Success hinges on educated and cautious approaches, allowing investors to take full advantage of both dividends and options income—what could be more exciting than having your money work harder?