- Find a dividend paying equity. The DOW-30 and S&P 100 stocks are a good choice these days.
- Buy some shares about 30 days prior to the ex-dividend date. You will need to buy in multiples of 100 shares. If you already own a dividend paying stock that is profitable then use that. Round up your share ownership if necessary.
- Sell a front-month call(s) against your shares no later then closing bell the day before the ex-dividend date. I prefer to sell the first out-of-the money strike above my entry price if I can get a price equal to or greater than the dividend. The first in-the-money strike can be used if it is closer but still above your entry price.
- Once filled on the call, I place a GTC order to buy-back the calls for a nickel.
Saturday, June 11, 2011
Double Dividends With Covered Calls
The covered call strategy should be every smallDogInvestor's first option strategy and lifelong friend. The reason is that there is a high success rate and very little downside risk. I like to use the covered call strategy on dividend paying stocks. The reason is that the payout of the dividend produces a predictable run-up and drop in the price of the stock. Here's how this works: