Monday, June 13, 2011


It took 5 weeks of down market action to happen, but in the same week, two of the more conservative institutions - Schwab and Nuveen - each came out with reference to the in-the-money (DITM) strategy I have been successfully testing for over two years. Schwab's top option guru, Randy Frederick, advised in an investment letter, to use almost exactly the plan I have been using, although he scalps with a 1-month call, rather than 5-6 months to get 2 dividends.

Nuveen has 3 CEFs (closed-end funds), using Index options and having to rely on premium/discounts, have underperformed the ETF plan. My main source of reference - Seeking Alpha, describes them.

Over the weekend my Merck (MRK) got called away after 6 months. The numbers are:

Bought Dec. at $3490, received 2 dividends at $76 (after rolling out calls to July) and a total return of $167. Dividing $167 by initial $3490 and doubled for 12 months, gets one to 9.57% annualized - sort of like buying two 6-month CDs with the same money.

Since this downturn is the perfect environment for DITM (cheaper stock prices, higher dividend %, more option volatility), I have been selling puts on stocks that are not quite to ex-dividend dates, with the hope of having them put to me.

A good example is McDonald's (MCD) which was exercised in May for my Sept. call - so I sold a put for the next cycle.

1 comment:

  1. Thanks for the interesting blog! This is all a new concept for me. I was wondering what your opinion is in regards to using REITs for a dividend play? For example, AGNC.

    Do these make good choices? Is the option volume too low?