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Trading Ideas

Buy & Write Strategy For Income

This article covers the “Buy & Write” strategy which, when used correctly, can increase income, your average cost, and downside potential. This strategy is best when an investor isn’t very bullish on a name or the market, but needs or likes to have the income it provides. With this strategy, the investor reduces downside by gaining more income, but also reduces potential capital gains because of the obligation to deliver the stock should the price rise above the option price. Below we expand on 5 names with which one my employ this strategy. All 5 names pay large dividends which we see as fairly safe in the current environment.

Altagas is an energy infrastructure company with assets in both Canada and the United States. Although it recently cut their dividend, the company is still paying a 6.8% monthly yield, which at current levels looks fairly sustainable, although higher risk. Because of its recent volatility over the last year, options are yielding solid premiums. For investors at all interested in the name, if one buys 200 shares around Friday’s close at $14.02/share and writes a covered call right now on it for April, it yields $0.60/share for $1 OTM. Should the option get exercised, one will still end up with $48 in dividends, $120 in premium, and around $200 in capital gains from the purchase price to the exercise price. This represents an expected $368 profit (minus trading and option exercising fees), representing close to a 13% return on your original investment in 3 months, should the company rally above the $15 option price. Should the price not reach the exercise price of $15, you keep the shares wherever there trading, while having made $120 in premium, and the dividend payments, with now a lower cost basis.

Keyera is a midstream company located primarily in the oil sands and Alberta. The company pays a generous 6.4% monthly yield, with a target of raising it 8% Long term. The company historically has been more conservative an operator than other midstream peers (Interpipe, Pembina), but is going through a heavy Capex phase currently. With 200 shares at current price (around $28.30), for options going into July, one can get close to a $0.90 premium for $1.75 OTM. That equals around $180 in premium, while investors will also collect the monthly dividend, which by July would be another $180 in dividends. Should the options get called, you would get around $300 in capital gains from purchase price(current price) to the price the option gets exercised, and another $360 in income, meaning total returns are capped at $660 on close to a $4900 investment, in 6 months. This represents around a maximum 13% return. Should the options not get called, you receive the premium and the dividends, and keep the stock at whatever price below the option contract it is trading at, while having made extra income.

Alaris is a Canadian investment company investing in preferred shares in partner businesses in which they receive a dividend from. The company pays an 8.8% dividend monthly, having raised the dividend in October. Although higher risk with a fairly higher payout than the previous 2, it offers a great opportunity to buy and write options for, while collecting a large dividend. A $19 call option 180 days out yields around $0.80/share in premium. On 200 shares of the company right now, (closed January 18th at $18.69/share) which is around a $3750 investment, you’ll receive $160 in premium, and $165 in dividends, representing 8.5% in income in the 6 month period. On top of this, if the company gets called away at $19, you receive another $60 in capital gains from buying at around 18.69 and selling at the contract date of $19 if it reaches that or higher. Should one be interested in the name or not overly bullish but appreciate the income and premium, this could be a solid trade in an uncertain market.

NFI is the bus and coach maker based in Canada, with operations across North America, has had one tough year. Shares have almost been cut in half, and now the company is yielding a growing 4.8%, with a fairly good balance sheet. Although somewhat economically sensitive, the company still has good revenue and earnings visibility with its large backlog of orders. With a 200 share position as an example, selling a call at $34 dollars for July, one will receive around $1.60/share premium, while having upside on capital gains up to the option exercise price of $34/share. With the shares trading currently at $31.19, that is still close to $3 potential upside on capital gains, while reducing risk should the trade go the opposite way by lower your cost basis by $1.60/share. All played out, you’ll receive on the 200 share position, valued at around $6300, $150 in dividends, and $320 in premiums, representing 7.5%. Should the stock stay below the $34, you keep the close to 5% premium on a solid company, get the dividends, and reduce your cost basis, therefore reducing your risk should the stock continue to go down. Should the price rally, you will still get some of the upside, until $34 share, meaning this is a great opportunity should you not be overly bullish on the name. At any price above around $29, you’ll be profitable on the trade, beating buying the stock outright and having around $31 as a cost basis.

Not much out there is considered more defensive than a telecom, although AT&T has large amounts of debt. However, the company does have the stable cash flow to continuously keep paying and occasionally raise their large dividend. Currently the company is a paying 6.6% yield at current price of $30.96/share. For an option in July again, one is receiving $1.05/share for over $1 OTM, which means on 200 shares, the premium is around $200. This mixed with $204 in dividends, means that one will receive around 6.5% in income in half a year, while having $1 dollar in potential capital gains should the price go above $32. This makes for a fairly defensive strategy in a defensive name that should help income lookers whether volatility while collecting a large dividend and option premiums.