This past week, Cabot held its annual Cabot Investor Conference in Salem, Massachusetts. All of the Cabot analysts attended, as well as many subscribers from all over the country, including as far away as Alaska. It was a great couple of days to talk about what the analysts and the investors are seeing in the market, and to meet so many nice and smart Cabot subscribers.
I had a couple of takeaways from the conference:
Cabot analysts are trading the market very cautiously right now. The weakening breadth, which I have highlighted in the last several weeks for my subscribers, was a real source of concern for all analysts.
Cabot Options Trader and Cabot Options Trader Pro subscribers at the Conference asked me about many of their current stock positions on which they do not have options positions. I gave them ideas to create yield as well as hedge.
Cabot Options subscribers at the Conference would like me to incorporate more ideas from Cabot Analysts Tim Lutts, Mike Cintolo and Roy Ward. This is a strategy we have used successfully in the past, as these analysts have successfully picked stocks for well over a decade in both good and bad markets. I will use more of these fine analysts’ picks going forward.
The biggest takeaway, though, was from one of my panel discussions. Many investors attending the Conference were stunned by an example I used for creating yield in a stock like Aflac via a Covered Call/Buy-Write strategy. Aflac (AFL) is currently recommended by both Tim Lutts in Cabot Stock of the Month and Chloe Lutts Jensen in Cabot Dividend Investor.
Aflac started the year trading at 61.50, and has slowly gained another three percent at the mid-point of this year. Three percent is not the type of gains that excite many investors (though little has this year as the S&P 500 is virtually unchanged year-to-date). So how can we create a little extra yield to boost those returns? In my conference panel discussion on “How to Make Money in Any Market,” I showed the audience that against a long AFL stock position, a trader could use a covered call strategy to make an additional 1% a month.
A covered call is a strategy in which the trader holds a long stock position and sells a call option on the same stock in an attempt to generate income. For every 100 shares of stock you own, you can sell one call. If you own 500 shares of stock, you can sell five calls.
A covered call is a VERY conservative strategy that requires no margin and is a great way to create yield and lower your cost basis on a stock position, while giving up the potential for explosive upside gains.
In my panel discussion, I showed that by selling one call each month, against 100 shares of AFL stock, an investor could have collected an additional $65 a month in yield. This is a yield of 1% each month so over the course of 12 months, your return is 12%. Add to that AFL’s $0.39 quarterly dividend, and the yield on an AFL covered call is approximately 15% for the year. This shocked many investors in the room!
Here is a list of covered calls that we have traded this year at Cabot Options Trader and Cabot Options Trader Pro:
ATML 13.71% gain
XPO 6.26% gain
QLIK 7.42% gain
WWAV 10.21% gain
CY 5.63% gain
INFN 4.55% gain
Total: 47.78% gain
S&P 500 YTD: 0% gain
The AFL example and the successful covered calls above sparked significant interest and questions. As I told the investors in attendance, if you have never traded covered calls before, I recommend that you first choose a stock in which you own more than 100 shares. For example, if you own 1,000 shares of Facebook, I recommend that you only sell one call in order to learn how the strategy works. (If you have any questions on how to execute this strategy, I invite you to email me at jacob@cabot.net.)
Once you become familiar with the strategy, you can execute more covered calls. By adding this strategy to your investing arsenal, you can create a little bit more yield every month for your portfolio.
Your guide to successful options trading,
Jacob Mintz
Chief Analyst, Cabot Options Trader and Cabot Options Trader Pro
