This is not a trade recommendation, this is a trade idea. I'm not a financial advisor, anything written here should be taken with a grain of salt. I take no responsibility If you will decide to invest
I like the idea of selling options on a "good" dividend stocks, preferably from the Dow Jones list.
At the start of 2020 I established the so-called partnership fund - once a month buying a few shares with PFE (Pfizer Inc) for my better part. It was planned that by the end of May 2020, we will have some 45 shares already, but as I was hit hard in March because of the downturn in the markets, I had to sell off some of my holdings (including PFE). Anyhow as of today, we have 15 shares with PFE and we need at least 85 shares more before we can proceed with selling covered calls.
As much as I like idea selling monthly covered calls, I decided to see - what could we get from selling weekly options on PFE, and results are quite impressive.
Generate weekly income selling covered calls on PFE stock
On May 21, 2020, you could buy 100 shares of PFE stock spending $37.63 per share or $3,763, and simultaneously sell out of the money May 29 expiry covered call at the strike price of $38 for about $0.45. That gets you $45 and makes about a 1.19% return in 8 days. Or about 53.55% annualized. Break-even: $37.18
If PFE stock closes below $38 on May 29, you keep the premium and start over.
If the stock closes above $38, your stock gets called away, but you keep premium $0.45 + realize value gain $0.37 ($38-$37.63) from selling stock higher than you bought. Total $82 or about 2.17% potential income return in 8 days.
There are several options you could use not to get shares called away, like a roll-up or roll forward. Or you could sell the stock, and start over by writing cash-secured put and get stock back.
Remember, you are selling one contract, 100 shares of PFE stock, make sure you have 100 shares to sell if called away.
The biggest risk - involving in covered call strategy - the stock price could fall below our buy price and stay there for months/years.
PFE is a decent dividend buy - it has risen its dividend for the past 10 years, and currently is paying $1.42 anualized, thats about 3.7% dividend yield (before tax). We think that selling options on a good dividend stock is a win-win.
About weekly options
Weekly options are option contracts that only exist for eight days, which differs from normal option contracts that exist for a month.
Weekly options give option traders the opportunity to profit on a week to week basis rather than waiting to profit from month to month.
The Chicago Board Options Exchange created weekly options in 2005 as a result of more investors getting involved in option trading. Popular indexes, ETFs, and stocks can be traded with weekly options. See the current list of available weekly options on the CBOE website.