Boosting Income with Options

02/01/2013 6:00 am EST


Brian Stutland

Managing Member, The Stutland Volatility Group

Options expert Brian Stutland discusses a strategy that he finds many retirees are turning to as they look to boost the yield of their portfolios.

My guest today is Brian Stutland.  He is a contributor to Options Action on CNBC.  We're talking about an options strategy for the remainder of 2012 you might be able to implement.  So, Brian, talk about what ideas might you have for the rest of 2012 in options.

We get a lot of questions and a lot of investment people that want to come to our advisory firm that are around that retirement age, the 60-65 year old and the Federal Reserve has made it very tough on people right now.  They've bought up Treasuries and they're starting to buy mortgage backed securities now and so it's difficult to find yield in this marketplace and so they're basically telling you, you need to get into the market.  You need to get into the stock market if you want to find any kind of significant yield.  So one thing we're starting to look at is blue-chip-type companies and getting in there, but adding an income enhancement to that by selling a call against it. 

So let's say for example, a very basic consumer staple stock like Hershey's.  It's had a tremendous run actually over the last few years.  You wouldn't think it.  All they do is make chocolate, but you know, as the world population continues to grow, more people will consume food and so this is a great way to play the agricultural food space and one way to stay long the market.  They pay a nice little dividend yield.  But one thing, to reduce some of the risk, it's great to get that dividend yield when you buy a stock, but if the stock market goes down 5% or 10%, that dividend yield effectively is gone.  So what we'll do is we'll sell a call, pick let's say 5% or 10% to the upside, a call that's expiring two or three months out.  We'll sell that call, bring in a little extra income on that stock so that you capture the premium of the call that you've sold plus you're long the stock, that's called your buy right strategy.  Okay.  And this strategy has been effective over this last year.  Now, it won't do as well as the market.  If the market has a big bullish move to the upside, you may miss out on some of that participation.  But what this does is limit a little bit to the downside.  It allows you to get into the stock market and stick with blue-chip consumer staple type of stocks.  It's a great way to high yield and get a little bit of high yield out of this marketplace right now.

So if the market does trade in a range and Hershey stays about the same.


Should I close that trade out before it expires or just let it expire, lock in those gains, what should I be doing?

I think that's a great question, actually.  And I think it's key, as you get closer towards that expiration time of a call that you said and Hershey's is in that range, we always look to go ahead and buy that call back or close it out or let it expire and then go ahead and initiate another two or three months.  If my thesis was I want to be out of Hershey's stock if it moves 5% or 10% and I'm happy with a 10% gain in a quarter, which is fantastic returns, right, then go ahead and sell another call and sell another late dated call against that position and continue to stick with that position.  But always monitor what's going on with that.

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