Employing out-of-the-money short-term covered calls can help you generate additional income. This article touches upon such a strategy I have successfully employed.
A significant percentage of our investments are held in accounts that are separate and distinct from those which are included in the FFJ Portfolio. While I do not disclose specific details related to investments held outside the FFJ Portfolio, I do share limited information on buy/sell transactions executed through undisclosed accounts.
This brief article addresses:
- the outcome of out-of-the-money Korn Ferry (KFY) and Becton Dickinson (BDX) covered call transactions which expired March 15th;
- the new covered call initiated March 21st on BDX.
These shares are held in the FFJ Portfolio.
On September 10, 2018 I initiated a few out-of-the-money covered call contracts (each option contract is for 100 shares) with a $55 strike price and a March 15, 2019 expiry (after commission I pocketed just shy of $1.35/share).
This KFY article explains my rationale for initiating this trade. Although the article was posted September 20, 2018, I executed this trade on September 10, 2018 while at the airport waiting for a flight departure.
UPDATE: On March 15th, KFY closed below the $55 strike price and the call options I wrote expired worthless. This means is I keep the option premium AND I still own the underlying shares.
If you access your online broker’s website you will see that KFY’s option premiums and option trading volume are currently both exceptionally low. KFY does not present an attractive covered call opportunity at this time.
These shares are held in one of our retirement accounts.
I have owned BDX shares dating back to early 2009 and have increased my position on a few occasions over the years. As disclosed in this article, BDX is one of my larger holdings.
In November 2018 I wrote this article in which I indicated I had initiated out of the money covered calls on a few stocks of which BDX was one; I generated $1.60/share. Those options expired worthless so I retained the underlying shares.
On February 6, 2019 when BDX was trading at ~$243 I wrote this article in which I disclosed that I had initiated a few out-of-the-money covered call contracts. The BDX contracts were for a $250 strike price and a March 15, 2019 expiry; I collected $1.95/share.
UPDATE: I purposely wrote out of the money covered calls with a $250 strike price because I was reasonably confident that BDX’s share price would not rise to this level; I do not want to part with my BDX shares.
Fast forward to the week ending March 15, 2019. BDX’s share price closed just shy of $254 at the expiry of these option contracts. On March 18, 2019, BDX shares were withdrawn from the investment account in which they were held in exchange for $250 cash/share; I will still receive the quarterly dividend ($0.77/share payable on March 29, 2019 to holders of record on March 8, 2019) on the shares with which I had to part ways.
I intend to hold BDX shares for the long-term and am merely employing this conservative option strategy to skim some additional income. When I initiated the option trade I told myself that if my BDX shares were called away that I would reacquire the same (or greater) number of BDX shares if/when they retraced to $250/share or lower.
As luck would have it, BDX’s shares plunged to ~$243 on March 18th. After checking what could have triggered this price plunge and finding no negative news I repurchased the same number of BDX shares which had been called away thus netting me ~$7/share in cash.
New BDX Covered Call
Since I do not want to part with my BDX shares, I am focusing on strike prices well above the current ~$243 market price. While nothing is out of the realm of possibility, I think the probability of BDX’s stock price rising to $260 within the next couple of months is sufficiently remote that I am prepared to look at short-term options at this strike price.
The option premium for a BDX April 18 2019 $260 call is unattractive so I am not interested in this trade.
The current bid/ask prices for a BDX May 17 2019 $260 call are $1.75/$2.15. This is reasonably attractive so I have just initiated this trade at $1.90/share.
If you are seeking to generate additional cashflow, a conservative out-of-the money short-term covered call option strategy can help you in this regard. The drawback is that the share price of the underlying security can rise above the strike price….and continue to rise! As the writer of the covered call, however, you have capped how much you will receive per share. If you are willing to accept this drawback then this option strategy might be appropriate for you.
I wish you much success on your journey to financial freedom.
Thanks for reading!
Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to email@example.com.
Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.
Disclosure: I am long KFY and BDX.
I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.