Results of balancing excellent returns with greater safety

Because of its high Beta for a blue-chip stock (1.24), we found the company that was the most promising dividend aristocrat on which to sell derivatives. Call it balancing returns with safety.

American and Canadian investors could sell covered calls on that company’s shares in any account. Concerning cash-covered puts, Canadians could only sell these outside tax-advantaged accounts.

Accordingly, on Monday, August 3,  we bought shares of that company in our registered accounts and sold just out-of-the-money covered calls on it, expiry date August 21, the closest available. (C 21AUG20 290.00)

We got $US4.21 per share. (Results for cash-covered puts would be similar.)

Using the formula P/SP x 100 = R in which  P = premium, SP = strike price and R = rate of return for the three weeks, we get $US4.21/$US290 x 100 = 1.45%.

1.45%/3=0.48% per week x 52 = 25% per year.

Using the figures from last Friday, July 31, we were counting on a return of more than 2% for the 3 weeks and not the 1.45% that we received!

This tells us that we cannot count on yesterday’s closing figures to calculate expected returns for today.

But a 25% annual return? Who would be unhappy with that? And the company?

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Dr. Milan Somborac

The Monday Morning Millionaire Program supports do-it-yourself (DIY) investors which I have been for over 50 years. About my team and me