The Fiscal Cliff is upon us.
And if you are a dividend investor, be prepared to give some
of your hard-earned dollars back to Uncle Sam.
Exactly how many dollars? That depends on your income, of
course. Last week I gave readers a
"fiscal cliff" calculator
to answer that question. And now, with an amount in hand, we can
all figure out how much we need to make to get back some of our
Let's get to it.
For simplicity's sake, let's use the average stated in the
link above. A married couple filing jointly with three
exemptions and a $125,000 income would face $6,135 more in taxes,
or a 28% increase.
Okay, $6,135 … that's higher than I anticipated, which could
be a challenge to make up annually.
Let's see how much we can take off the $6,135 bill with this
one simple strategy.
The strategy? Covered calls, a strategy I believe all
self-directed investors need to take a serious look at going
The covered call strategy is a conservative options strategy
whereby an investor holds a long position in an asset and sells
call options on that same asset in an attempt to generate
increased income. Unlike buying options outright, this strategy
allows you to take a conservative stance so you can sleep well at
All you need to initiate the strategy is 100 shares of
stock and a highly liquid options market. By highly liquid,
I mean heavily traded options that that have narrow bid-ask
If you own at least 100 shares of stock, then you have the
ability to "sell a call" against your stock (assuming it has
options, which most do). Remember, 100 shares of stock = 1 option
Let's say that you've worked hard to collect 500 shares
Furthermore, you believe in the long-term prospects of the
company and have no intention of selling the stock any time soon
- it's a long-term investment.
Given this scenario, how do you make back the $6,135 that
Uncle Sam plans to take next year?
With Wal-Mart trading at approximately $72, the 500 shares are
worth $36,000. Again, you like the stock's long-term prospects
but feel in the shorter term that it will likely trade relatively
flat to lower, perhaps within a few dollars of its current price
If you sell a call option on WMT at the $75 strike in March
(expires on March 15, 2013) you could bring in $105 per contract
or $525 for your 500 shares. Do this four times per year and you
could bring in $2,100. Not a bad way to tack on an additional
By comparison, if you went out to the $80 strike you could
bring in $45 per contract or $225. Four times a year totals $900,
adding 2.5% annually to your holding.
If you use this strategy, one of three scenarios will play
a) WMT shares trade flat (below the strike price) - the
option will expire worthless and you keep the premium collected
when you sold the calls. In this case, by using
the covered call strategy you have successfully
outperformed the stock.
b) WMT shares fall - the option expires worthless, you keep
the premium, and again you outperform the stock.
c) WMT shares rise above your strike price - the option is
exercised, and your upside is capped at your strike price plus
the option premium collected. For example, if you collected $45
per contract, the covered call strategy will underperform the
stock at any price above $75.45.
Remember, covered calls make money when stocks are slightly
higher, flat or down. You only get the underlying stock "called"
away if it rises significantly.
So again, why would any investor choose to shy away from such
a proven income strategy that has outperformed the market and
dividend-paying stocks over the long term?
And while we were not able to make back all of the $6,135, we
certainly were able to make back a nice portion in a very
If you would like to learn more about how I use options for
income or to steadily grow my investment account please be sure
to sign-up for my free weekly report,
The Strike Price
Moreover, whether it's
Small Cap Pro
editor Tyler Laundon and his impressive returns, or Jason Cimpl,
Top Stock Insights
, with his above average gains we here at Wyatt Investment
Research are here to give you actionable and sound ideas that you
can use for your long- or short-term investment endeavors.
Editor and Chief Options Strategist
The Strike Price