In this post, I’m going to share with you how to get double dividends.
Dividends times 2 using the power of options.
How Dividend Works
Before we get started, I want you to understand how a dividend works.
Let’s say you’re interested in purchasing a stock like McDonald’s. A lot of times what happens is four times out of the year you get a dividend.
Money comes into your pocket based on the number of shares you have.
Let’s say you have a hundred shares, and the stock for conversation’s sake pays 50 cents per share. You make $50.
The second time comes around. This could be April time. Again you get more money.
You get another $50. And another $50, and another $50.
You only get dividends four times a year unless the stock is weird wacky or something else is going on. But in general, you’re getting it four times a year.
How to Get Double Dividends – McDonald’s Example
Here’re a few critical questions:
How do you make more money from McDonald’s by using the power of option?
How do you multiply this times two if you have stock shares?
I’m going to share this concept with you. This concept is called covered rights. You could also call it a covered call strategy.
If you already have stock, this strategy will work just fine. And basically, it’ll multiply your dividends a little bit more.
I’m not saying you’re going to get exactly two times. But you’ll be able to make a little bit more than just the dividend itself by using the power of options.
Let’s see how this works on the screen and go from there. Now before we get there, keep in mind if you want to learn more about options, check out our website TradersFly and check out our courses about options, stock trading.
Check it out and help us out. Support us, and that way, we can make other great free videos as well on YouTube.
Take a Look at McDonald’s at the Screen
You usually want to buy a hundred shares. I’m going to analyze this trade. And we’re going to do 100 shares.
If you want to look up McDonald’s dividend, you can look at the dividend history and what it’s paying out.
The normal dividend yield is about 2.6%. This will give you a lot of details. You could also look it up more on things like the Nasdaq.
Well, it’s getting a cash amount of about a $1.25, and here’s these declaration dates, payment dates.
You have a hundred shares, and you get a little bit more buck and a quarter for it.
How do you make a little bit more than that?
Every quarter you’re going to get $1.25 for these shares for every share that you have. But if you want to make a little bit more, here’s a covered call strategy or writing covered calls.
The way this strategy works is if I sell some premium up ahead. Especially if McDonald’s is at all-time highs. Maybe you think it’s going to pull back. Perhaps you think it’s going to stall. Then you could do this six months out of 12. You could do this ten months out of 12.
You could do it two months out of the year. Whatever your choice is and you could do it close or far out.
The whole point behind this strategy is I’m going to sell something further up.
Right now, the stock price is $193, and I’m going to sell something at $210, or I could do it at $205, depending on the strikes. I could do it at $200, and I’m selling a call at those levels.
And what’s going to happen is when I sell that call at that level, that’s going to force me to give up stock if the stock price goes above it.
Now, if it never gets or hits that level and doesn’t stay above it, I get to keep the premium, and I get to keep the stock. If it goes way above it, the downside is I missed out on some stock profit gains. That’s because if the stock shoots up to $230, I would have to sell that stock at around $200 or $205.
Let’s see what we can do here.
Here are my option dates. Here are the calls. I could sell one about 37 days out.
Right now, the stock price is 193, and I could sell some premium. I would get $2.56 or, in other words, $256 for at the 195 strike price. That’s close. It’s got a 40% chance of hitting and being in the money.
If you want to keep your stock, you go further out. Now you get less money, but you go further out. If you’re okay with getting rid of your stock, what’s going to happen is if I sell one super close and we sell a single (analyze that trade), it’s close.
You could see right next to the price almost. If it does go above that 195 level and stays above it, I don’t make any more money from the stock.
I still get to keep the premium, and in this case, I make an extra $256. And I could make that every month. In general, way more or just a little bit more than the dividend. But chances are I’m going to lose that stock.
What if you don’t want to lose the stock?
Well, you could go to maybe about 200. And in this case, you’ll make a $111. That’s because you’re selling 1.11 on your premium.
Each contract controls a hundred shares. That’s why you have to have at least 100 shares to do this. If you have 200 shares, you could sell just one of these. And that way only you have half stock. And you have to sell one contract for premiums.
That way, if the stock does continue to keep going, you only lose 100 shares out of your 200. That is nice as well.
You could see that the profit picture will continue to move. That’s the cool thing about this strategy. You could do this every month, every 30 days. I could do it every 60 days.
Let’s say we go out even further. I could go to January. If I go further out in time instead of December 37 days out, I could go 65 days out.
Now what I could do here is I’ll make a little more on the premium side, but I have to wait a little longer. I could go to 200 or even 210. That will give me 51 cents. This will give me $215. You could see it’s a ten-point spread difference there.
You have to guess is this stock will continue to explode or is it going to stay and hang around. It’s another way also to head your position a little bit as well.
If things continue to move down, this protects it a little bit. In this case, if we went to January, look how far out it is.
The current price is 193. That stock has got to jump almost 10, 20 points, and then I would lose the stock. But I don’t get as much premium. If I tighten it up and go to 200, well, in this case, I make $215. And that is about 60 days, 65 days but chances are I might lose that stock.
I could get out of it early. Let’s say the stock hangs out, and then it starts moving up. Well, chances are with time decay; you see what’s going to happen. That white line will continue to get closer to that green line.
And I might still be profitable about $165 a few weeks into it. And then I could get out of it if the stock continues to move up and buy back. I won’t get my full $2.15 on the position.
But I’ll get some of it. In other words, you’ll get dividends from the stock. And you could sell covered calls. It gives you the power of almost two dividends if you think of it that way.
And this is a great strategy to do if stocks don’t have a dividend to sell covered calls. That way, you get a synthetic dividend or a dividend substitute for stocks that aren’t paying out dividends.
Here’s a lot of great stuff for you: