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New Investment in MO


On Thursday I bought 2000 shares of MO at $19.90. I sold (20) Jun 10' $20 calls for .54. There are two dividends before the June expiration of .34 each. Here are the three scenarios that can play out.

Scenario 1: I get exercised before the first dividend in mid March because the call options are ITM. If this happens my return is .54 on the calls and .10 on the stock. Total return of .64/19.90 = 3.2% for 30 days, roughly 38% annualized.

Scenario 2: I get exercised before the June dividend because the call options are ITM. If this happens my return is .54 on the calls, .10 on the stock, and .34 on the March dividend. Total return of .98/19.90 = 4.9% for roughly 120 days, roughly 14.7% annualized.

Scenario 3: The stock trades below $20 near both of the March and June dividends and the contracts eventually expire worthless. In this case my yield off the original investment will be .54 on the calls, .34 x 2 dividends, total yield of 1.22/19.90 = 6.1% for 120 days. If this happens, my risk is that I can't sell another covered call at a strike price above my cost average. But this is the reason I chose a stock I am comfortable owning long-term as the dividend yield is currently 6.8%.

My preference is to get exercised early in March and take the 3.2% for 30 days and move on to the next investment to hopefully replicate the same type of trade in another name. However, I am comfortable grinding away long-term as well as my goal for this portion of my portfolio is to yield a minimum of 1% a month. If I can yield 6% in 4 months then I'm well on my way. Those are small percentages compared to what can be realized on short-term option trades, but the total dollar return and lower risk is what I'm looking for and why I'm classifying it as an investment and not a trade. I'm going to commit $100,000 to these types of investments in hopes of generating a minimum of $1,000 a month from them. I would not put $100,000 in pure option trades that carry 100% risk. So far my average risk on pure options trades is just a few thousand dollars.

Here is a chart in reference to the price/dividend action I spoke of earlier.

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