Chemicals giant Dow is one of the top yielding stocks in the Dow Jones Industrial Average, and Dow stock has recently gotten cheaper by the day. When a stock drops, the dividend yield rises — assuming the payout remains the same.
Investors searching for steady income in the long term can further enhance the yield on DOW by using a covered call strategy.
When selling a covered call, the investor receives a premium and must sell the shares at the strike price if called upon to do so. One call option contract represents 100 shares, so investors can sell multiple call options if they have a particularly large stock holding.
Over time, covered calls can increase returns while also decreasing the volatility of a portfolio.
Dow Stock Today: Which Call Option Looks Juicy?
On Dow stock, a Dec. 16-expiration monthly call option with a 47.50 strike price traded recently at $1.65. This call would generate $165 in premium per contract and boost the annualized yield by 29%.
DOW currently pays around $2.80 in annual dividends per share.
So, generating another $1.65 per share from covered call writing in only one and a half months is quite attractive.
The $1.65 in premium received also gives a small buffer on the downside of 3.65%. That means Dow stock could trade 3.65% lower between now and Dec. 16, and the covered call trade would still break even.
The total capital at risk in the trade in Dow stock would be $4,528. So, if DOW stock went to zero, that's how much the trade would lose.
Covered calls are a fantastic way to generate extra income from a stock holding while also providing some downside protection.
Investors would need to weigh the pros and cons of the stock before initiating a bullish trade like a covered call.
The downside of the trade? The stock is still etching a downtrend and is not highly rated at this time.
Dow stock is poorly rated according to the IBD Stock Checkup with a Composite Rating of 34, an EPS Rating of 62 and a Relative Strength Rating of 33.
Please remember that options are risky, and investors can lose 100% of their investment.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
