I think everyone can generally agree that idle cash sitting in your account doesn't earn you much. Here are a couple of methodologies to deploy that capital to emulate dividend generation without being in the stock itself.
For purposes of this exercise, I've chosen HYG, which is not only options liquid, but also has a decent dividend relative to the broader market. Currently, it's 4.92% annually, and its last monthly dividend was .359/share compared to SPY's annual yield of 1.59% and TLT's 1.57%.
In the past, I've used several different methodologies to generate a yield approaching what the underlying is paying annually, depending on how much capital I wanted to or needed to tie up while waiting for opportunities.
(a) The Once a Month/30 Days 'Til Expiry Option: When the next monthly is 30 days until expiry, sell the option paying greater than or equal to the current monthly dividend. Run it until expiry and allow the option to expire worthless and/or take on shares if in-the-money, and sell call against at the same strike as you sold the put. Manage thereafter as you would any ordinary covered call. This is potentially the least buying power intensive setup if you're just selling one contract per month and will necessarily be of short duration.
(b) The Each and Every Weekly 30 Days 'Til Expiry Option: Each week, in the expiry nearest 30 days until expiry, sell the option paying greater than or equal to the current monthly dividend, again allowing each successive weekly option to expire worthless and/or take on shares if in-the-money, selling call against at the same strike as you sold the put, managing it thereafter as a covered call. Naturally, if you want to do something like this each and every week, doing, for example, one contract per week, you'd be tying up greater buying power and/or notional risk to do so. The upside: your longest duration is going to be 30 days.
(c). The Laddering Out in Successive Monthlies Option: Instead of doing just the next monthly at 30 days until expiry, ladder out 30, 60, and 90 days until expiry, selling the put in each successive monthly expiry for an amount greater than or equal to the current monthly dividend. For example, sell the December 18th 83 for .38; the January 15th 80 for .42; and the February 19th 76 for .38. When the front month expires worthless, consider selling a new back month, again for a credit that is equal to or exceeds the monthly dividend. The downside to this methodology is that it is not only buying power intensive, it ties up buying power for greater duration.
Mr. Pines is putting on an options clinic; best to sit down and take notes!
NaughtyPines
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@bb_jm, Lol. Trying to get a little more programmatic here before retirement. It's been difficult to keep maximally deployed this year with each successive cycle's short puts approaching worthless, and itll probably become more difficult this coming year with volatility ebbing (at least the way I've been doing things). I've previously just sat out the majority of volatility lulls, but that's not been as productive as I'd like.
EZcurrency
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Wow, that's a great way to emulate getting dividends via options. I would have never thought of that. Another great post!
NaughtyPines
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@EZcurrency, You can do similar things in any instrument, but I generally choose one that I don't mind getting assigned on and that will pay if that happens. Alternatively, you can do spreads to keep a greater amount of buying power free. For example: January 15th 74/81, paying .38 (5.04% ROC at max); February 19th 73/80, paying .44 (6.3% ROC at max), etc. The one thing 2020 has been great for is premium selling, but I can see that potentially being not quite as great in 2021, so will begin to deploy this type of thing in volatility lulls.
JamesPowell
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A rule of thumb is that if something sounds to good to be true it generally is no so true when you dig into it. The same applies here with this short put strategy. So a short put means that you are selling or otherwise writing the put. Opposite of selling or writing a call. So for the average Joe that’s not going to be possible unless it’s a covered put(or call) meaning you have to own the stock in blocks of 100. So the covered put requires you tie up a lot of money. However if a trader has a huge enough account he could sell the options naked. However you still have to have the cash on hand to cover the potential loss. The only way I see a regular Joe/Jane actually doing this is with a long call. Meaning the trader simply buys calls on the stock. Owning the stock is not required to buy a call or a put. To short a call or a put though that’s a different animal and not just anyone can do it. Not without the stipulations mentioned above. ... if I’m wrong let me know. I thought I was wrong before but I was mistaken. Hahahah just kidding.
NaughtyPines
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@JamesPowell, You can sell a put on margin or sell a put in a cash secured environment. On margin, the buying power effect should be about 20% of the strike price; cash secured, the buying power effect will be the strike price minus the credit received, so, no not an "average Joe" trade cash secured because it's going to tie up 83.00 (the strike price) minus (right now) .35 or 82.65 ($8265). In contrast, a covered put is a bearish assumption setup where you short shares of stock and sell puts against to reduce cost basis over time. A covered call is a bullish assumption setup where you buy stock and sell calls against.
NaughtyPines
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@NaughtyPines, Practically speaking, all these broad market short put trades (SPY, IWM, QQQ) I do are >100k account types of things. Average 401(k) balance of "forty somethings": $93,400; average for "fifty somethings": $160,000. :-)
@NaughtyPines, right, i agree. Average joe/jane probably not going to want to do that on margin. I wouldn't. I am a believer in covered puts and calls though. There is another side to that cover coin too. So a covered call can be both bullish and bearish depending on if you want to get called out or not. Same but opposite with puts too. I would imagine some traders wanting not to be called out an some that actually hope to be called out.
NaughtyPines
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@JamesPowell, Exactly. For smaller accounts, a lot of people generally just spread the put side to take a bullish assumption position (or the call side if they want to be short) that they can afford or to budget buying power because a naked one lot is just too big. This is especially important in cash secured where nakeds are buying power hogs. On margin, it always pays to compare buying power effect of a naked versus a spread; depending on how wide you go with the spread, there may not be much difference in buying power effect between the two. Naturally, this is different than risk: spread risk is capped out; naked isn't. I will occasionally buy "monied" covered calls where the short call is in the money because I want to be called away or "Thelma and Louise" the short call into the money to be called away where I've reduced the cost basis such that I can get out of the play profitably and want to take less risk running into expiry for whatever reason.