5 Ways We Generated Option ‘Income’ With Opportunities Going Forward

Lucky7traderWritten by Nick Ackerman With the latest options expiration for this month, we have five trades concluding, all of which have expired worthless. All five of these trades were also put writing trades, which were on Schwab U.S. Dividend Equity ETF (SCHD), NextEra Energy (NEE), Realty Income (O), AT&T (T) and Stanford Chemist’s idea on B. Riley Financial (RILY). These are mostly the types of names that benefited from being value-oriented stocks, of which higher interest rates have beaten down. When the CPI report showed a continued cooling in inflation earlier in the month, that led to a rally in this area of the market, as it is seen as an indication that the Fed could cut this year. This was after it was starting to look like we may not see any rate cuts in 2024 and thus would have kept pressuring these sorts of names. All of these are names that I would look to write more puts on, and I was watching to do that leading up to their expiration this week. However, after what was a strong rally into the value space, I wanted to be a bit patient for some potential weakness to get some better premium when writing puts. Overall, the lack of volatility this year has been a drag on writing options. That said, so far, that was the right call. Thursday and Friday ended up being weaker days for equities. YChartsWe will have to wait to see what the market brings to us next week when it opens, but I’d be more comfortable writing puts now on these names once again. Schwab U.S. Dividend Equity ETF This is a name we’ve been employing our put-writing strategy on regularly throughout this year. I’m long a position in this fund already, but I’m looking to add further to my position to utilize the option wheel strategy, as well as remaining long to a certain degree. However, our trades have consistently expired worthless as SCHD has trended to trading higher throughout this year. This latest trade was initiated on June 25, 2024, following up the previous worthless expiration. We pocketed $0.35 in premium, and that worked out to a potential annualized return of 6.91%. We had selected the $77 strike price, and shares initially hovered around that price before getting lifted by that positive CPI report. YChartsHere is a look at the breakdown of all the trades on SCHD for this year. Ticker Expiration Date Upper Strike Lower Strike Current Price Type Sold Date Initiated Premium Collected Date Closed Closing Cost Gain/Loss SCHD 07/19/2024 $77.00 – Expired Puts 06/25/2024 $0.35 Expired – $0.35 SCHD 06/21/2024 $78.00 – Expired Puts 05/21/2024 $0.25 Expired – $0.25 SCHD 05/17/2024 $77.00 – Expired Puts 04/17/2024 $1.49 Expired – $1.49 SCHD 04/19/2024 $77.00 – Rolled Puts 03/15/2024 $0.40 04/17/2024 $1.09 -$0.69 SCHD 03/15/2024 $75.00 – Expired Puts 02/16/2024 $0.27 Expired – $0.27 SCHD 02/16/2024 $73.00 – Expired Puts 12/21/2023 $0.50 Expired – $0.50 Click to enlarge In looking at what moves we could make next, here are next month’s August 16, 2024 ideas. $81 strike to bring in the most premium as it is writing at-the-money puts, assuming the price is around this same level next week. For that, we could bring in a premium of $1 for a PAR of 16.69%. $80 strike leaves a little bit of downside cushion and would still bring in a decent premium of $0.65 for a PAR of 10.98%. At the $79 strike price for even further downside cushion, we could still collect a respectable premium of $0.45 for a PAR of 7.6%. NextEra Energy NEE has been a bit more volatile lately as the CPI report sent utilities up significantly, but working against that a bit is the higher likelihood of a Trump presidency. With a Republican-led presidency, renewables are seen as facing potential pressures as regulations could change to put less of a focus on producing green energy. NEE, of course, is a utility company positioned with a particular focus on renewables. That led the stock to trade a bit more erratically, but ultimately ended up pretty flat from the time we entered this trade on June 11, 2024, to today. We had selected the $67.50 strike, and it never really came to pressuring that level. With this trade expiration worthless, we were able to lock in that $0.45 in premium—working out to a PAR of 6.40%. YChartsThis is another position that I’m long, and I was here just simply looking to get longer. This company is set to have its earnings released on July 24 before the market opens, which is leading to elevated levels of premium thanks to higher implied volatility. This company also has weekly options available. With that, here are a couple of ideas that I’m looking at, both on the monthly expiration of August 16, 2024. At the $67.50 strike is where I’m leaning, which could bring in $0.80 in premium for a hefty PAR of 16%. An even more aggressive investor could consider the $70 strike to try to bring in $1.50 for a PAR of 28.97%. Realty Income This is another favorite we’ve been using this year to write puts, and really, it’s a frequent name over the last couple of years. Around a year ago, we took an assignment of a batch at $57.50, and I’ve held a long position for a number of years now. O really blasted higher after getting that cool CPI report, and that basically guaranteed we’d be locking in that option premium of $0.85. We entered this trade on June 3, 2024, at the $52.50 strike price—overall, working out to a PAR of 12.86%. YChartsHere is a recap of all the moves we’ve been doing this year. Ticker Expiration Date Upper Strike Lower Strike Current Price Type Sold Date Initiated Premium Collected Date Closed Closing Cost Gain/Loss O 07/19/2024 $52.50 – Expired Puts 06/03/2024 $0.85 Expired – $0.85 O 05/17/2024 $52.50 – Expired Puts 04/19/2024 $1.12 Expired – $1.12 O 04/19/2024 $52.50 – Rolled Puts 03/13/2024 $1.25 04/19/2024 $0.12 $1.13 O 03/15/2024 $52.50 – Rolled Puts 01/24/2024 $0.55 03/13/2024 $0.30 $0.25 O 01/19/2024 $40.00 – Expired Puts 10/30/2023 $0.85 Expired – $0.85 Click to enlarge In total, we’ve now been able to rake in $4.20 in premiums throughout this year alone. For some context, the premium received here puts it ahead of the current annualized dividend rate of $3.156, with O’s latest monthly dividend amount. That’s also without taking an assignment of any additional shares—so that means for writing cash-secured puts, that cash set aside has also been earning a decent chunk of money these days as well. That will be one thing to miss when the Fed starts cutting rates; the ~5% cash yield has been quite beneficial. Shares have run higher, and I’d really like to see a bit of a dip; however, I still believe that O is quite attractively valued at below $60. In fact, I believe that anything, even in the $65 to $70 range, is still fairly valued—even higher if we get more rate cuts than expected over the next year or two. O Fair Value Estimate (Portfolio Insight)For that reason, I wouldn’t mind turning around and writing some puts at current levels. They are expected to post earnings on August 5, 2024, so any trade here will have to consider that, but this REIT doesn’t generally move that big on earnings announcements. A conservative trade could be the $55 strike on the August 16, 2024 expiration. An investor looks like they could snag a premium of $0.30 (bid/ask is $0.30/$0.35.) That works out to a decent PAR of 7.37%. More aggressively, we could go at the $57.50 strike, writing an at-the-money put to bring in a sizeable premium of $1.05 (the bid) for a PAR of 24.69%. For those who like going out a bit further, they could choose the September 20, 2024, expiration at the $55 strike. There is potential there to bring in a premium of $0.70, working out to a PAR of ~7.50%. AT&T Finally, the last written put trade I had expiring this month was on the former dividend favorite T. Of course, when they ‘reset’ their dividend post-spin-off of WarnerMedia, it became vilified by a lot of investors. Probably for good reason, as the company made a number of mistakes, and that has been reflected in the share price grinding lower for many years now. That said, I sold it higher and only got back in lower at $19 by writing puts. Albeit, that has now been nearly two years ago, in mid-2022. So, I didn’t end up riding it down through most of the declines. Instead, it’s mostly been a grind sideways. I think things at T are looking better these days, though certainly not without risks. I covered my overall thoughts more recently. With a potentially brighter outlook, I’ve been looking to revisit this position again and potentially add to my long position. That’s what prompted me to write puts earlier this year on April 8, 2024, at the $17 strike. This brought in $0.73 in premium and worked out to a PAR of 15.37%. Shares initially dipped below that strike but ultimately ended up trending higher throughout the trade to even eclipse the previously assigned $19 price tag. YChartsI also wouldn’t mind turning to writing some covered calls on my already long position. So, we have quite a few options with this name moving forward. Earnings for AT&T are expected to be posted before the market opens on July 24, 2024. B. Riley Financial RILY has been quite volatile and moving heavily toward the downside. This has created a situation where options premiums are richly priced, allowing us to bring in meaningful premiums even with a significant downside cushion. This trade was originally entered on January 2, 2024, at a $2.5 strike price. That was good for being able to see the stock fall nearly 90% before the strike was breached. We collected $0.30, and even with that downside cushion, it worked out to a PAR of 21.90%. Our investing group has continued to share further ideas on RILY going forward, including the currently outstanding trades that both expire on January 17, 2025. In these cases, we have sold puts at strike prices of $5 and $2.50, currently ~71% and ~86%, respectively, below the latest trading price. Essentially, these are bets that the company will remain solvent.

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