People say that dividend investing is boring, and I get it. After you buy the stock, there’s really nothing else left to do but check your portfolio every now and then and wait for the dividends to come in. Then, maybe at some point down the line, you’ll sell your dividend stocks for a capital gain.
That is, except for when you throw options trading in the mix.
You see, certain option strategies like covered calls allow you to leverage your long-term dividend stocks, be it a Dividend Aristocrat or King, to boost your profits. Selling covered calls allows you to collect additional income from your dividend stocks in exchange for potentially giving up a little upside. And if you carefully manage your calls, you can repeat the process.
Naturally, if you already own dividend stocks, like, say, Coca-Cola, you can use the Covered Call tool on the asset page to screen for potential call options to sell. Then, you can decide the expiration date and strike that works best for you.
Income investors can earn an additional 0.5% - 1% or more in monthly premiums by selling covered calls.
Today, however, I’ll show you how to use Barchart’s Option Screener tool to find the best dividend stock you can buy to sell covered calls - right now.
Then, I’ll break down the trade and give you risk-mitigation strategies to avoid getting assigned.
Looking For The Right Covered Call Trade
First, let’s jump over to Barchart’s Covered Call Option Screener. You’ll be brought to the results page first.
The default results page is a good start for covered call trades. As you can see, all the relevant details, like premiums, strike prices, expiration dates, percentages, and probabilities, are on display.
However, we’re looking for covered calls on dividend stocks like Kings and Aristocrats, so let’s click on the Set Filters tab at the top. There, you’ll see the default filters for covered calls. I’ve added some filters and changed the values of some of them to personalize my analysis.
- Underliyers Found on the Watchlist: This cross-functional filter allows me to access and search my Barchart Watchlists. As you can see, I’ve limited the search to Dividend Aristocrats (25 years of straight dividend payment increases) and Kings (50 years), so I know I’m getting good quality dividend stocks on my screens.
- Bid Price: This filter indicates how much you can sell the covered call for per share. I set this to $1, so the minimum premium I’ll get from the trade results is $100 total.
- OTM Probability: This filter gives us an estimated probability of the option expiring out of the money, allowing you to avoid assignment. I’ll set this to 70% or more.
And so, with these filters and values, here are the screen results:
These trades are arranged by the highest potential returns by default. The top three trades, all on TGT stock (Target Corp), are pretty decent, but I’d prefer to use the third one, as its expiration date is closer. So, let’s break down that trade.
Covered Call on Target: Trade Details
The screen indicates you can buy 100 shares of Target Corporation at $127.39 per share, bringing your initial capital to $12,739. Then, you can write a $140-strike call on that stock position for $2.06 per share or $206 total in premium per contract that expires on March 7, 2025, 10 days from the date of the screen. This trade has a 77.83% chance of expiring out of the money, meaning there’s a big chance you get to keep the full $206 (minus trade fees) by expiration.
The trade also has a -0.24084 delta. For a quick reference, delta is an option Greek that tells us how much the premium is expected to change for every $1 change in the underlying stock’s price. Traders also use it as a quick indicator to check the probability of an option expiring worthless. Here’s a quick reference guide on how to interpret delta for covered calls:
Source: Barchart Covered Calls For Beginners Guide
So, if TGT doesn’t trade at $140 by March 7, you get to keep your 100 shares - and that’s the goal. However, if TGT stock is trading near the strike by expiration, I suggest closing your short options with a buy-to-close order. It will give you some extra peace of mind. You will need to pay a little premium to buy back that short call. However, it’ll likely be near zero as options lose value the closer they get to expiration - especially if they are out of the money. Doing so assures there’ll be no chance of getting assigned and losing your shares.
The trade also has an annualized return rate of 427.2%. That means if you could sell a 10DTE covered call for $206 (but not necessarily with the same strike price) for the whole year and not get assigned, you could earn back more than 400% of your capital. Of course, that’s just a broad overview; the market will change over time, so you’d have to adjust your trades accordingly.
Target also pays $4.48 in annualized dividends, translating to a 3.51% yield, so if you can keep your shares, the income will keep coming.
Rolling Positions and Assignment
On expiration day, one of two things will happen. TGT’s stock price will either be higher or lower than the call option strike.
Whatever happens, the ideal situation is for the call to expire worthless, and it happens if the stock trades below the strike at expiration. Then, you can sell another call with a different strike and expiration; rinse and repeat.
If however, the stock is near or exceeds the strike, it’s suggested to roll your position. To roll your covered call, start by buying back the call with a buy-to-close order - this will close it out. Then, sell another call with a later expiration date, always paying attention to the OTM probabilities and/or delta. This means the strike will likely be different as well. This is called rolling your position.
IMPORTANT: If you don’t roll your position and TGT hits or exceeds $140 at expiration, your short call will be assigned, and your 100 TGT shares will be called away at $140 per share, even if TGT soars above $140. This isn’t necessarily terrible, though, as you’ll still earn money from the trade - specifically, $12.61 per share from the sale of the stocks plus the $2.06 premium, bringing your net profit to $14.67 or $1,467 per contract. Not a bad payday. Then, you can again use the screener to find another target (an option target, not the company.)
Final Thoughts
Covered calls can be a great way to boost your income while still receiving income from long-term dividend stocks. Sure, it comes with the risk of losing your shares, but with proper risk management, you can avoid assignment and keep getting premiums from options trading.
