Yesterday I started the day with 75% of my account in cash due to the NFI being called. So I started to research where to trade next.
First, I went through my list of high dividend stocks with dividends being paid in the next 30-60 days. The theory is that I can bump up my return by capturing a dividend as well as option time premium. I found the theory is tough to put into practice. To work I would like the trade to meet the following criteria:
- Quarterly dividend of at least 2%. It is surprising how many stocks are paying 8% plus annually. Most are in shipping, natural resources, mortgages and business financing.
- The price is at a point where there is a call available that is in the money by at least the projected dividend. This is the tough one: If you sell an at-the-money call, the share price will drop when it goes ex-dividend, and you may be stuck with shares at a lower price than you paid. Too far in-the-money and you do not have enough time premium to justify the trade.
- The time premium must be enough to cover the commission costs plus provide an additional 1% plus of profit. Most of the high dividend stocks do not have enough volatility to generate that much time premium. Also, I am trading only 100 or 200 shares at a time so the commissions are a higher percentage cost than if I could trade 500 or 1000 shares.
After going through the above criteria with about 10 high dividend stocks, I could not find any trades that made sense. My next post will cover the follow on research and the trades I did place.