With the recent wave of cuts in dividends by historically reliable dividend-paying companies, income investors are finding it increasingly difficult to secure high dividend yields. In fact, Standard & Poor's expects the year 2009, the largest drop since 1942 in the distributions. The decline in the stock market has created many dividing erroneously high because the companies that have received their dividends despite losses are suddenly paying recordDividend yields. The other edge of this sword is that many companies cut their dividends to save money, thinking that their payments even lower offer strong signals because of their low stock price.
In addition, the higher volatility of the decline of the market has devalued investors associated key, allowing them to invest less capital if they decide to rebalance their portfolios.
A good, conservative strategy that effectively usesMarket volatility in the high dividend block the covered call is to sell or buy / write technology. The increase in market volatility has increased premiums option called, so that investors can sell covered calls high-yield shares many, in fact, gives them a "double dividend" is unique in that their initial investment outlay of cash protection and also some disadvantages. Since no company can cut the premium on their call options, these tools are synonymous withan "iron" dividend. In fact, the awards often called real investors higher returns than the underlying stock dividends. So even if the company cut its dividend, the investor will still sell the award of its covered call. In addition, the seller receives a cash prize called recalled in his account of conciliation (generally commercial plus three days).
Writing covered call gives you the possibility of price increases, as well as high yields,They receive calls made from premium / dividend, the title should be assigned (sold), at the end. Investors often calls that are about 5-20% above the current price, raising the potential to sell an additional 5-20% cover profit, the shares should rise above the threshold of the covered call by the end of the term. Given the historically low level, that the fall in share prices of many companies feel many traditional value investors, who buy theseUndervalued stock price, and the reason that there is a good opportunity to grow in the future.
To illustrate this technique, let's look at the prices for NYSE / € later (NYX), as of March 4, 2009 Closed:
STOCK PRICE / SHARE: $ 16.36 dividend increase: $ DIVIDEND YIELD 1.20/SHARE: 7.33%
CALL Base Price: $ 17.50 Call premium: $ 3.25 called static YIELD: 19.86%
CALL Expiration Date: 15 Jan 2010 YIELD TOTAL STATIC:27.19%
Total potential yield ASSIGNED: 34.16%
As you can see from this example yields, this title is 19.86% call the sales income of 2.7 times its dividend yield of 7.33%. So, even if they cut their dividends, the investor in this example, the protection of the capital almost 20%.
If the dividend remains intact, the downside protection all in this business, 27.19%, which corresponds to the total emissions of static efficiency (the combination of dividend and the return call). InIn addition, by selling a call to the $ 17.50 strike price, cost about 7% compared to $ 16.36 / share, the investor also has the potential for a total return of 34.16% assigned which is a very convincing argument for this strategy.
Trading Summary for this example:
Tie: $ 11.91
Share price up retail: $ 17.50
Static Yield: $ 435.00
Assigned potential income: $ 559.00
Calling Static Yield: The yield achieved if the underlying shares allocated / not (sold)at or before the deadline. In a scenario of "static" is the title of the stock price will be above or close enough to buy the combined price of the exercise price and the premium call, you pay for the actions of the call buyer the other side of the trade. In the previous example, the price of the shares on or near $ 20.75 ($ 17.50 exercise price plus the premium call $ 3.25) would increase it pays for the call buyer exercises his option to purchaseActions.
Total yield static obtain the combination of dividend yield and the call is static.
Assigned call made: The income recognized when the underlying shares / (sold) are assigned at or before the deadline. This usually happens when the share price rises to or above the combined price of the exercise price and the premium call, so that the shares will be assigned (sold), the exercise price, in the example above is $ 17.50 .
Risks and limitations: As with anyInvestments, there are risks. Obviously, this strategy can not guarantee that such stocks are not altered, after you buy. However, these are value-oriented, "double dividend" strategy called at least will give you more downside protection if it is to buy stocks, and the premium phone call to reduce the cost base.
Upside risk to: Given that this strategy puts the maximum profit potential, you should be aware that even if theTaking estimates more than your strike price and premium of the call, you are still required to apply this to your covered call strike price, puts a limit on the potential sale of profit. And 'more useful to the call of the theoretical value of an option pricing model like Black-Sholes research before you trade, the chances of the call is returned the money to be determined at maturity. You should always analyze their static and associated gains and break-even before all of the CoveredCall (buy / write), strategy. Many online brokers have automated the option-pricing calculator that simplifies this process.
Downside risk: the biggest risk factor in the sale of covered calls is that you have a lot more money here than put at risk simply by purchasing a call option. However, research has shown that the odds in favor sellers over buyers.
You should make sure that you fully research a title before performing this or any other strategy.
But howit must be said, if the stock goes beyond your break-even point, you will be able to use some of the losses that are sold for "the purchase of new" calls for a profit, and call, perhaps in rotation in a price lowest exercise, if maintained, is to compensate for their underlying position.
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