ROI for Buy/Writes on Dividend Stocks

Discussion in 'Trading' started by NoDoji, Jul 14, 2008.

  1. NoDoji

    NoDoji

    I'm considering buying high dividend stocks with some cash in my IRA and selling covered calls on them. Anyone with experience in this have feedback as to the average returns doing this? The market's really volatile, making my income projections seem rather high.
     
  2. 1) It's a lousy "strategy" in a bear market. Capital losses can exceed the option premium.
    2) Implied volatility levels may increase thereby boosting the option premium.
    3) Higher dividend paying stocks tend to be more stable (less volatile) which detracts from the amount of premium you can expect to collect.
     
  3. You must be looking at different high dividend stocks than most traders. Stocks like BAC and NLY with high dividends have very high volatility.
     
  4. You are correct. Then again, how "safe" is a double-digit dividend yield?
     
  5. NoDoji

    NoDoji

    I'm definitely hesitant to start this strategy prior to the election because I believe there's further bottom to this market. The top picks I came up with include FRO, BPT, CALM, ERF, NAT and VLCCF. The highly volatile picks that stand to lose a lot in the short term, but have strong upward trends over the long term are GNK and DSX.
     
  6. Once the dividend yield on a stock goes over 10% the odds of continuing to collect a double digit yield approaches zero.
     
  7. You are correct again. Then again, how "safe" is your principal with a stock whose dividend is likely to be eliminated? :confused:
     
  8. NoDoji

    NoDoji

    Actually, several of these have remained in the double digits for many months now.
     
  9. You're mostly correct. The lower the price goes, the "better" the dividend gets! :D
     
  10. NoDoji

    NoDoji

    BPT, FRO, BPT and ERF have been gaining value for all those months. We used to own them during the 2000-2002 time period and didn't even notice there was a recession :p
     
    #10     Jul 14, 2008