The chart below had me perplexed as to why more people don’t use options as an investment tool.
Basically, as stated in the chart above, I would need as much as $200k to make a $1,000 yield in Apple (AAPL) and roughly $14k to make $1,000 if using Altria (MO) as your underlying. Either way, the dividends are paltry in comparison to what you could potentially make if you decided to include options in your income strategy.
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For instance, let’s say you forgo the dividends in the stocks above (maybe because a lack of capital) and instead, decide you would like to use an options strategy for income using the same stocks.
Let’s take a look at a few examples.
Home Depot (HD)
According to the table above it would take $54,054 to make $1,000 in annual dividend income. Home Depot (HD) pays a 1.88% yield
However, as an option trader, we know that there are far more efficient ways to make 2 to 3 times that amount while taking on far less risk in the way of capital costs.
For instance, let’s take a look at a poor man’s covered call. One of the most efficient options strategies for making consistent income while simultaneously limiting risk through the reduction in capital cost.
When taking a look at the LEAPS for Home Depot going out 686 days, we could purchase the January 19, 2024 calls for roughly $98.25 or $9,825 per LEAPS contract.
So we could buy upwards of 5 LEAPS, equivalent to 500 shares of HD for less than the $54,054 stated to make the $1,000 in annual dividend income.
But let’s see how much we could make by selling a call against 1 LEAPS contract, as my preference would be to diversify income among a basket of stocks instead of spending all of your allocation on one stock.
After looking at the April 14, 2022, expiration cycle (41 days left until expiration) it’s clear that we can sell calls at the 345 strike for a minimum of $4.30 per contract.
Basically, we can make $430 per contract every 41 days by selling a call at the 345 strike.
So, with an investment of $9,825, all things being equal, we can make roughly $430 every 41 days. That’s a 4.38% return on capital.
And rather than making $1,000 annually with an investment in HD stock of just over $54k, we can realistically bring in over $3,400 in premium on an annual basis with an initial investment of $9,825. Far less than the $54,054 needed to bring in $1,000 annually from HD’s dividend.
Verizon (VZ)
According to the table above it would take $20,704 to make $1,000 in annual dividend income. Verizon (VZ) pays a 4.80% yield.
However, as I stated before, as an option trader, we know that there are far more efficient ways to make 2 to 3 times that amount while taking on far less risk in the way of capital costs. We clearly saw this in our Home Depot example, and I would expect to see something similar with Verizon
Let’s take a look at another poor man’s covered call. Again, one of the most efficient options strategies for making consistent income while simultaneously limiting risk through the reduction in capital cost.
When taking a look at the LEAPS for Verizon going out 686 days, we could purchase the January 19, 2024, calls for roughly $10.60 of $1,060 per LEAPS contract.
So we could buy upwards of 19 LEAPS, equivalent to 1,900 shares of VZ for less than the $20,704 stated to make the $1,000 in annual dividend income.
But let’s see how much we could make by selling a call against 1 LEAPS contract, as my preference would be to diversify income among a basket of stocks instead of spending all of your allocation on one stock.
After looking at the April 14, 2022, expiration cycle (41 days left until expiration) it’s clear that we can sell calls at the 57.5 strike for a minimum of $0.55 per contract.
Basically, we can make $55 per contract every 41 days by selling a call at the 57.5 strike.
So, with an investment of $1,060, all things being equal, we can make roughly $55 every 41 days. That’s a 5.19% return on capital.
And rather than making $1,000 annually with an investment in VZ stock of just over $20k, we can realistically bring in over $440 in premium on an annual basis with an initial investment of $1,060. Far less than the $20,704 needed to bring in $1,000 annually from VZ’s dividend.
So, we didn’t quite make $1,000 by taking on one contract, but we could take on three LEAPS and sell calls against them and bring in approximately $1,320. Out initial cost would be $3,180. Still significantly cheaper than it would cost to buy over $20,000 worth of VZ stock to make $1,000 in annual income from dividends.
As always, if you have any questions, please do not hesitate to email me or post a question in the comments section below. And don’t forget to sign up for my Free Newsletter for education, research and trade ideas.