My strategy for the current volatility in the markets.
I want to generate an additional stream of income from my dividend paying stocks. So I plan to buy more of my current dividend paying stocks that have done well despite inflation. And sell stock options on these stocks( Covered Calls). Selling options is much more profitable during times of economic uncertain because the option premiums are larger. Premium is another name for the money you get selling options. Options are a form of security against loss during market volatility. They are comparable to insurance, and like all insurance, the greater the risk, the greater the price you pay. It's the same for stock options, so during market volatility option premiums are larger, so
Dividend Stocks
These are stocks which usually ith a good history of appreciation, or price increases each year. They also pay a quarterly (every three months) payment, called a dividend.
Hence these stocks are called Dividend Stocks. In this way, these stocks pay me two ways, stock price appreciation and stock dividend, so they provide two streams of income. I sometimes refer to them as my double dippers as in I get profits from them two different ways.
Option Covered Call
I wish to pause to define a few terms.
“Premium”
In exchange for the rights conferred by the option, the option buyer has to pay the option seller a premium for carrying the risk that comes with the obligation. The option premium depends on the strike price, volatility of the underlying, as well as the time remaining to expiration.“Expiration Date”
Option contracts are wasting assets and all options expire after a period of time. Once the stock option expires, the right to exercise no longer exists and the stock option becomes worthless. The expiration date and month is specified for each option contract.Call Option
A call option is an option contract in which the holder (buyer) has the right (but not the obligation) to buy a specified quantity of a security at a specified price (strike price) within a fixed period of time (until its expiration. For the writer (seller) of a call option, it represents an obligation to sell the underlying security at the strike price if the option is exercised. The call option writer is paid a premium for taking on the risk associated with the obligation. For stock options, each contract covers 100 shares.
Okay, back to our strategy for the third stream of income.
One way to make money is to sell the option to buy your stock, at a price you think the price won't reach by the option expiration date.
This is not difficult to estimate based on the probability numbers assigned to each future price on the buy ordeer section of the options charts.
When the option expires, so does your obligation to sell, and you keep the premium. The beauty of this is you can sell these options every week or every month, as a way to earn additional income.
This is how they make money for me a third time, a third stream of income, and now I call them triple dippers.
Summary of the Triple Play for three streams of income:
I calculate three streams of income in this way for the triple play works:
- Stock Price Appreciation
- Stock Dividend Payment
- Stock Option Premium
That is how I run this play. Do you have any ideas or suggestions for optimizing my earnings with this play?
@shortsegments
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One thing to note is that you may not want to sell options when it's paying dividends because when it does pay and your stock is called, you gotta pay back the other person the dividend. It does work well as a strategy but I find that most dividend stocks don't really have that high of a premium.
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The strategy is complicated on dividend months, so I skip those months.
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