Hey Everyone,
I've been tasked with finding some income generating investments for my Dads IRA. One thing that I've been playing with theoretically, but haven't tested out practically, is using a deep in the money covered call with long dated expiration to leverage a dividend yield. I think the easiest way to explain is by example:
Take a stock like Bank of America (BAC). Trading at 22.60 with 30 cent annual dividend the stock only pays a 1.33% dividend. Rather than invest in BAC bonds (which are trading at a substantial premium over par), what about selling something like the 10 strike call. The 10 strike call expiring January 2019 has a bid/ask spread of 12.50/12.90. Now clearly the intrinsic value of the call option is 12.60 (due in whole to the current price being 12.60 over the 10 strike). So why not put in an order to sell the 10 strike calls at 12.70. It would be the midpoint of the spread meaning there is a better chance of getting filled (vs 12.90) and their would be some (albeit small) time premium which would discourage early execution of the option.
The end result would be being long the stock with an actual equity investment of 9.90 and you would still be receiving the .30 annual dividend. Due to the decreased equity, the yield on the dividend now looks more like 3% than 1.33%.
Please, asides from order execution, can someone punch holes in the idea.
P.S. - I recognize this is not practical on a small scale, however I do have the ability to execute these trades on a larger scale with lower reduced commissions. Thoughts?
Submitted January 22, 2017 at 10:13PM by jpoms13 http://ift.tt/2j3gUet
