Option strategies can act as a complementary method for boosting your portfolio returns. The best dividend stocks in the market yield approximately 2-3% and the dividend growers growers tend to increase their dividends year after year giving you a pay raise for simply holding the stock. Some dividend stocks may yield higher (3-6%) but may not necessarily increase their dividends year after year. To generate a high revenue stream to live off the dividends from your holdings requires a huge portfolio when high quality stocks pay 2-3%. Lucky for us, there are simple options strategies that we can use to supplement our income and boost our returns. This post requires a basic knowledge of options trading. The strategy covered are writing out-of-the-money (OTM) put and call options.
Using these simple options strategies, you can generate more income in your portfolio leveraging the dividend stocks. The option strategies discussed here are not limited to dividend stocks and can be applied to any optionable security. Note that options trading is extremely risky and because these are leveraged trades, the losses can be substantial. Always make sure you fully understand the trade and how it works before you start trading.
Writing out-of-the-money put contracts
If you want to initiate or add positions on a stock, write OTM put contract. You collect the premium for the option that you wrote; and If the stock stays above the strike price, you simply keep the premium and it expires with no obligations. If the stock price drops below the strike price and the option is called, you buy the stock at the contract price and add to your position of the dividend stock. Your average stock price goes down below the strike price when you factor the collected premium.
Writing out-of-the-money covered calls
If you own the stock, you could write OTM calls on the dividend stocks you own. If the stock price stays below the strike price, you simply collected the premium and have thus generated income in your portfolio without any other obligations. If the stock rises above the strike price and is called, you sell the stock at a profit. Of course, you should be willing to sell these shares of the stock from your portfolio if the option is called.
These are short positions and these trades are called sell-to-open (STO). So, you are opening a trade by selling and when you intend to close the trade, you buy-to-close (BTC) or wait for the options to expire.
There are plenty of ETFs which uses this strategy to generate monthly income with yields as high as 8%. For a detailed look at this category, check coveredcalletfs.com
A note for Canadian residents
The government of Canada, in its infinite wisdom, allows its residents to only trade long positions (BTO and STC) and shorting covered calls (STO) in registered accounts such as RRSP and TFSA. If you want to STO puts, you will need a non-registered account. How the government justifies this, is beyond me!
Have you tried these trades to boost your income? What are your thoughts?Image Credit: Stuart Miles/freedigitalphotos.net
Disclaimer: The information provided here is for educational purposes only. All opinions here are my personal opinions and should not be taken as financial advice. I am not qualified to be a financial advisor. Always consult with your financial advisor before investing in any of the companies mentioned on this blog.