Wells Fargo stock and other banks have typically paid reasonable dividends. But in this era of still-low interest rates, yields on bank stocks are quite low. Plus, with markets looking increasingly volatile, investors might be more interested in generating income in a stock rather than capital gains.
Thankfully, as sophisticated investors, we can generate additional income from holding banks stocks by using options. Consider a strategy known as a covered call. It involves selling a call option against a long stock position.
Wells Fargo ranks No. 1 in the Banks-Money Center Group and has a Composite Rating of 86, an EPS Rating of 66 and a Relative Strength Rating of 89, according to IBD Stock Checkup.
WFC stock also boasts a 2% annualized dividend yield. Let's see how we can use a covered call strategy to increase the yield.
Let's suppose you bought 100 shares of Wells Fargo stock on Tuesday afternoon for a total around $5,060. An April 52.50 strike call option traded around $2.05, generating $205 in premium income per contract. So, selling the covered call option generates an income of 4.2% in just under two months, equaling around 35.8% annualized.
Wells Fargo Stock: How This Call Generates A Profit
If WFC closes above 52.50 on the expiration date, the shares will be called away at 52.50, leaving the trader with a total profit of $395 (a $190 gain on the shares plus the $205 option premium received).
That equates to an 8.1% return, which is 69.1% on an annualized basis.
Of course, the risk with the trade is that Wells Fargo stock might drop, which could wipe out any gains made in the stock from selling the call.
Investors looking to increase their income can use covered calls and cash secured puts on high dividend stocks.
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.
