1. High Dividend Yield – Above 5 % (The S&P 500 average dividend yield is approximately 3.42%).

2. Moderate Dividend Payout Ratio – Below 50 % (The S&P’s payout ratio is approximately 59 %).

3. Less Than 40 % above 52-Week Low

4. Options Available

5. Current Ratio: Over 1.5

6. Long Term Debt to Equity: Under .5

These conservative screens yielded two solid high dividend stocks.

We then detailed the impressive yields that you could earn by either, buying these stocks outright and selling covered calls, OR, by just selling puts against them.

Given the high yields that both of these strategies afford, which is the best way to go?

As with most investing decisions, much of the answer to this question lies with your outlook for the market and for the particular stock, given your own individual investing goals. We’ve found it useful to have a checklist or “decision table” when deciding which way to invest in a well-researched stock that you believe in.

1. Market Outlook: Based on current trends, and upcoming events, where do you think the market is headed?

- Bullish: Sell Covered Calls

- Less Bullish: Sell Puts

2. Compare Annualized Yields: Since different strategies have different time horizons, the only way to truly compare them is by annualizing their yields.

Here’s a simple formula you can use for this:

(Yield % divided by number of days till expiration) times (365)

OR, you can get a quick and rough estimate by using months:

(Yield % divided by number of months till expiration) times (12 months)

You may have a long-term trade that pays you MORE money than a shorter term trade, but because your principal is tied up for longer, the annualized yield may actually be lower.

3. Cash Yield Timing: Since these 2 strategies require more cash than buying options, try to determine if you need all the cash right away vs. having it spread out in time.

- Staggered Payout: Sell Covered Calls

- Payout Now: Sell Puts

4. 52-week Low/High: Is the stock at a 52-week high, or is it still near its 52-week lows?

Selling puts that place your net cost basis near a stock’s 52-week lows has been a very successful strategy over the past 9 months for many value investors.

Likewise, selling covered calls also hedges your risk, and offers a high yield.

5. Dividend Payout/Timing vs. Option Payout/Expiration: Many financial websites have option chains that tell you how much dividend $ you’ll earn before expiration. Compare this to what you’d earn from selling puts during this same period.

6. Dividend Reinvesting: This is a powerful tool for accumulating wealth. If you’re able to reinvest your dividends, then, of course, selling covered calls is the way to go.

(These articles are written for informational purposes only and author will not be held responsible for any errors or omissions herein or any actions taken by third parties after reading these articles).

1. High Dividend Yield – Above 5 %

2. Moderate Dividend Payout Ratio – Below 50 %

3. Less Than 40 % Above 52-Week Low *

4. Options Available

5. Current Ratio: Over 1.5

6. Long Term Debt to Equity: Under .5

In part 3, we adjusted screen # 3 to: Over 50% below 52-week high”.

This adjusted screen gave us Olin Corp., (OLN), a Basic Materials/Diversified Chemicals company, which has two divisions -chlor alkali specialty chemicals and ammunitions for sports and the military.

Olin currently has a good dividend yield of approximately 6.2%, and their dividend payout ratio of less than 37% is very low for a high dividend stock. Olin’s 33% Debt-To-Equity ratios are strong and identical for both long term and short term debt.

Current Ratio: 1.9, meaning that their current assets are nearly twice as high as their liabilities.

OLN is also cheap by many other metrics:

Growth: A low PEG ratio of only .57 (investors look for PEG’s under 1)

Price/Book (P/B): Only 1.40

Price/Earnings (P/E): 6.17

Return on Equity (ROE): over 22%

Return On Investment (ROI): 12.24%

Return On Assets (ROA): 9.67%

Within their Diversified Chemicals peer group, they have the highest dividend yield and the lowest P/E ratio.

What if you want to be conservative and build a position in OLN at a price lower than its current market?

SELLING PUTS is a conservative high yield strategy which investors use to accumulate stocks at prices lower than the current market.

Each put contract sold potentially obligates the seller to buy 100 shares of the underlying stock. Brokers will vary in the cash reserve amounts they require a seller to post – some brokers want 100%, while others require less.

This trade example will use a 100% cash reserve, and no commission fees.

OLN is currently trading at $12.99.

1. Compare the cash yields of selling Nov $12.50 puts to the dividend yield:

If you were to buy OLN outright, at $12.99, you’d receive 2 remaining $.20/share dividends prior to Nov. expiration, which equals $.40/share, a 6.2% annualized yield.

OR

If you sold Nov. $12.50 puts,(OLNWV), you’d receive $1.60/share, a 28.5% annualized yield. Clearly, the put sale offers a much higher yield.

IMPORTANT CAVEAT: The put sale will be a short term gain, which is taxable at your personal tax rate, as opposed to the current 15% tax rate for qualified dividends.

Your Breakeven Price on this put sale is $10.90 ($12.50 strike-$1.60 put premium).

When the November expiration comes, there are 2 possible outcomes:

1. OLN declines to near or under $10.90, (($12.50 strike price less $1.60 put premium), and you are sold, (assigned), 100 shares of OLN at $12.50/share, (the put strike price).

However, your net cost would be $10.90, (the $12.50 strike – $1.60 put premium you received). This would put you approximately 21%+ over the OLN’s 5-year low of $8.97. A pretty reasonable price to pay for such a strong company.

2. If OLN doesn’t decline to near or under $11.90, your broker will release your cash reserve, and you walk away with $160.00 for every put contract you sold, a 28.5% annualized profit. (Either way, you keep your put premium $, whether you get assigned shares or not).

Many investors have been worrying about being left behind by the current rally. Selling puts is a way that you can still profit from solid companies, even though their prices have risen.

In the 5th and final part of this series, we’ll discuss other ways to analyze selling calls and puts.

Disclosure: Author is long OLN.

Disclaimer: This article is written for informational purposes only. Author not responsible for errors, omissions, or acts taken by third parties as a result of reading this article.

1. High Dividend Yield – Above 5 % (The S&P 500 average dividend yield is approximately 3.42%).

2. Moderate Dividend Payout Ratio – Below 50 % (The S&P’s payout ratio is approximately 59 %).

3. Less Than 40 % Above 52-Week Low

4. Options Available

5. Current Ratio: Over 1.5

6. Long Term Debt to Equity: Under .5

We then used the conservative bullish approach of selling covered calls to increase Cal-Maine’s already high dividend even further.

But, what approach can you take if you’re not so bullish on the market, which has gained over 35% since March 9, 2009, or, if you want to accumulate CALM at a lower entry price?

Instead of buying CALM at $24.93, (its June 1, 2009 opening price), a more conservative approach would be to sell covered puts on it, at a lower price. Selling a put on a stock means that you are selling someone the option to sell, or “put” the stock to you by a future date. Each put contract corresponds to 100 shares of the underlying stock.

Normally, most options aren’t exercised until near or on the expiration date,so the timing of possibly having the stock sold to you will depend upon what expiration month you choose. Due to the time value of money, if 2 options are at the same strike price, the one that’s further out in time usually commands a higher price. However, you should compare them on an annualized basis, in order to get a clear comparison of their returns.

How would this work?

First, you’d want to get an idea of this stock’s 52-week price range, which is $17.01-$48.80.

Due to the market’s decline before the current rally, and higher volatility, it has been possible in the last 8 months to profit by selling puts at or near a stock’s 52-week low. This is a rather conservative approach, allowing investors to “nibble around the edges”, instead of jumping in at a current higher price.

Looking at the option chain for CALM, and using the strategy of trying to sell a put as close to the $17.01, 52-week low as possible, we see that the August $20 put, (QKMTD), is currently priced at a $.75 bid, which equals 16.7% on an annualized basis.

There are 2 possible outcomes to this trade:

1. The stock has declined to or past your $19.25 breakeven point, (your $20 strike price less the $.75 put premium). You would then be sold 100 shares for every put contract you sold. The sale price would be $20.00, but your true net cost would be $19.25, (the $20 strike price less the $.75 put premium).

Owning CALM at $19.25 would place you just 13.2% above this stock’s 52-week low.

In addition, your $19.25 cost is 22.8% lower than the current price of $24.93.

ALSO, the $1.73/share dividend would equal an 8.98% dividend yield at this level, as opposed to the current 6.9% dividend yield level.

2. The stock doesn’t decline to or past your breakeven point. In this case, you’d walk away with a $.75/contract, 16.7% annualized profit.

Cash Reserve requirements: Brokers will vary on how much cash reserve they make you put up for selling puts. Currently, Schwab mandates a cash reserve equal to 100% of the value of the strike price times the shares you’d end up having put to you.

In our example, if you sold one $20 contract, which corresponds to 100 shares, you’d have to put up $2000.00 cash reserve.

Other brokerages, such as Options Xpress, require less cash reserve, which increases your leverage and your margins. However, if the stock does start to decline closer to your strike price, the broker may ask you to put up additional cash in reserve.

So, if you like a stock, but you think the market’s gotten ahead of itself, selling puts is another way to profit.

Disclosure: Author is long CALM.

Disclaimer: This article is written for informational purposes only. Author not responsible for errors, omissions, or acts taken by third parties as a result of reading this article.

A useful, conservative strategy that actually capitalizes on the market’s volatility to lock in high dividend yields is the Covered Call Selling or Buy/Write technique. The increased market volatility has increased call option premiums, giving investors the opportunity to sell high yield covered calls on many stocks, in effect giving them a one-time “double dividend”, reducing their initial investment cash outlay, and also offering them some downside protection. Since no company can cut the premium on their call options, these instruments are tantamount to an “ironclad” dividend. Indeed, the current call premiums are often giving investors higher yields than the underlying stock dividends. So, even if the company does cut its dividend, the investor will still retain the premium from his covered call sale. In addition, a call seller receives the call premium money back into his account upon settlement, (usually trade date plus 3 days).

Covered call writing also gives you the potential for capital gains, in addition to the high yields that you get from the call premium/dividend yield, should the stock be assigned, (sold), at expiration. Investors often sell covered calls that are approximately 5-20% above the stock’s current price, giving themselves the potential to realize an additional 5-20% profit, should these stocks rise past the covered call thresholds by the end of the investment term. Given the historic lows that many companies’ share prices have fallen to, many traditional value investors feel that they are buying these stocks at undervalued prices, and reason that there’s a very good chance of them rising in the future.

To illustrate this technique, let’s take a look at the prices for NYSE/Euronext (NYX),

as of March 4, 2009 market close:

STOCK COST/ SHARE: $16.36 

ANNUAL DIVIDEND: $1.20/SHARE

DIVIDEND YIELD: 7.33%

CALL EXPIRATION DATE: JAN. 15, 2010

CALL STRIKE PRICE: $17.50

CALL PREMIUM: $3.25

STATIC CALL YIELD: 19.86%

TOTAL STATIC YIELD: 27.19%

TOTAL POTENTIAL ASSIGNED YIELD: 34.16%

As you can see from the yields in this example, this stock’s 19.86% call selling yield is 2.7 times its dividend yield of 7.33%. So, even if they were to cut their dividend, the investor in this example would still have nearly 20% downside protection. If the dividend remains intact, the downside protection in this trade is 27.19%, equivalent to the total static yield, (the combination of the dividend and call yields).In addition, by selling a call at the $17.50 strike price, approximately 7% above the $16.36 cost/share, this investor also has the potential to for a total assigned yield of 34.16%, making a very compelling case for this strategy.

Trade Summary for this Example: 

Breakeven: $11.91 

Maximum Share Reselling Price: $17.50 

Static Yield: $435.00 

Potential Assigned Yield: $559.00

Investment Term: 10+ months (The Annualized Yields would be even higher than the yields listed above).

Definitions:

Static Call Yield: The yield realized when the underlying shares are NOT assigned/(sold) at or before expiration. In a “static” scenario, the stock’s share price doesn’t rise above or close enough to the combination price of the strike price, plus the call premium, to make it worthwhile for the shares to be bought by the call buyer on the other side of the trade. In the above example, the share price would have to rise above or near $20.75, ($17.50 strike price plus the $3.25 call premium), to make it worthwhile for the call buyer to exercise his option to buy your shares.

Total Static Yield: The combined dividend and static call yields.

Assigned Call Yield: The yield realized when the underlying shares ARE assigned/(sold) at or before expiration. This normally occurs when the stock’s share price rises to or above the combination price of the strike price, plus the call premium, causing the shares to be assigned, (sold), at the strike price, which in the above example is $17.50.

Risks and Limits: As with any investment, there are risks. Obviously, this strategy can’t guarantee that these stocks won’t decline further in value once you’ve bought them. However, this value-based, “double dividend” covered call strategy will at the very least give you more downside protection than if you had only bought the stocks outright, and the call premium lowers your cost basis.

Upside Risk: Since this strategy quantifies the upper limit of your profit potential, you should be aware that, even if the stock appreciates far past your strike price and call premium, you’ll still be obligated to sell it at your covered call strike price, which places a limit on your profit potential. It’s usually wise to research the call’s theoretical value in an options pricing model, such as Black-Sholes, before placing the trade, to ascertain the chances of the call ending up in the money at expiration. You should always analyze your static and assigned gains, and breakeven point before placing any Covered call, (Buy/Write), strategy. Many of the online brokers have automated options pricing calculators that simplify this process.

Downside Risk: The biggest risk factor in selling covered calls is that you are putting much more money at risk here than by merely buying a call option. However, research has shown that the odds tend to favor option sellers over buyers. You should make sure you research any stock thoroughly before executing this or any other strategy. However, as noted before, if the stock declines past your breakeven, you should be able to offset some of the loss by “buying back in” your sold calls at a profit, and perhaps rolling into a lower strike price call, if you want to maintain your underlying position.

copyright 2009 DeMar Marketing. All Rights Reserved Worldwide. This article was written for informational purposes only. Readers should not make any investment decisions based solely on the information in this article.

In this article, we’ll discuss a strategy through which you can buy a stock at a discount to its current price, or, at least earn a nice yield by trying to.

The 5 stocks we listed were:

1. Royal Dutch Shell (RDS-A, RDS-B) – Pays $3.20/share, yielding 6.4%

2. AT&T (T) – Pays $1.64/share, currently yielding 6.7%.

3. General Electric (GE) GE’s $.82/share 2009 payout currently equals a 6.1% yield. (The payout will decrease to $.10/share per quarter in the 3rd quarter of 2009, so the remaining payout/share for the balance of 2009 will be $.51, a yield of 3.8%, or 5.7% annualized).

4. Exxon Mobil (XOM) The company’s annual dividend rate is $1.60/ share, for a 2.3% current yield.

5. Chevron Corp. (CVX), has an annual dividend/share of $2.60, which equals a dividend yield of 3.9% at the current price.

If you want to buy a stock, but you feel that the current price is too high, you have 2 alternatives:

First: You can try to wait out the market, if you’re convinced of an imminent downturn and a cheaper price.

OR

Second: You can use the conservative option strategy of selling puts, to accumulate shares at a lower price.

As with selling covered calls, selling puts usually requires more initial capital than just buying an option outright, since brokers will require that you reserve up to 100% of the underlying shares value. (The % amount of required cash reserve varies from broker to broker).

Important note: Each put contract is tied to 100 shares of the underlying stock.

We’ll use AT&T, (T), in our example of this strategy.

T closed today at $24.59. In T’s JULY option table, there’s a $24 put, (.TSF), that’s selling for $1.10.

This $1.10 put premium compares favorably to T’s July $.41/share dividend, so it would still make sense to sell this put, instead of just buying T outright at $24.59 and waiting for the $.41 July dividend.

Just to keep it simple, assume you sold one JULY $24 put (.TSF) for $1.10, and that you had to have a cash reserve of 100% of the underlying value.

This trade breaks down as follows:

Cash Reserve: $2400 (100 shares x $24 strike price)

Revenue: $110.00 (1 put contract sold at $1.10 x 100 shares)

Yield: 4.58% ($110/$2400) Annualized Yield: 27.4%

Breakeven Price: $22.90 ($24 minus $1.10 put premium)

Discount to Current Price: 6.87% ($24.59 – $22.90)/($24.59)

Dividend Yield at Breakeven Price: 7.16% ($1.64/$22.90)

When the July expiration date comes, one of two events will occur:

1. If T hasn’t declined to or past the $22.90 breakeven, your cash reserve will be released, and you simply walk away with a 27.4% annualized gain.

OR

2. If T does decline to or past the $22.90 breakeven, 100 shares will be assigned/sold to you at $24.00 strike price. Your true net cost, however, is only $22.90, ($24 minus $1.10 put premium).

Sometimes shares may be assigned before expiration date, around the ex-dividend date, but this doesn’t happen a majority of the time.

The keys to selling puts are:

1. Deciding at what price you’d be comfortable owning the underlying shares. This, of course, requires due diligence.

2. Deciding how conservative or aggressive you want to be. It’s helpful to look at the 1 and 2-year lows for a stock, before selling puts, to see how various strike prices compare to the stock’s historical trading range.

In the past 6- 7 months, selling puts at strike prices below or close to a stock’s 52-week low has worked well for many traders. If you want to be more conservative, then sell at a lower strike price, further out of the money. While this approach will net you a lower premium, it might fit your risk profile better than selling at or close to the money.

Concerning the concept that selling puts allows you to buy a stock at a discount, some would argue that, if you had done nothing and just waited for a market downturn, you could have bought the stock at the lower price anyway.

While this is true, it’s also true that by selling puts, you’re giving yourself the opportunity to either earn a high yield on the put premium, if the stock’s price rises; or, to buy the stock at a predetermined, lower price of your choice, in the future, if it falls.

This conservative bullish strategy usually works best in a rising market, and it will give you two benefits:

1. Participation in a stock’s upward movement2. Some downside protection in case of a market decline.