Increase your income by selling stock options
It was BP shares turn in the earnings spotlight yesterday, and all-in-all the oil major turned in some solid numbers.
The addition of four new projects meant that oil and gas production — compared to a year ago — rose 4% to 3.8 million barrels a day. That increase offset lower oil prices and resulted in an underlying profit of $2.8 billion. That’s little changed from a year ago.
Along with a bunch of new developments coming online in the next few years, that all bodes well for increased production and a solid and potentially increasing dividend. And that’s important for income investors who hold BP shares.
When I checked yesterday, the forecast dividend yield was a whopping 6.3%. Now, why would anyone keep their money in the bank when you can get income like that from one of the biggest oil companies in the world?
But of course, that’s still not good enough for me. I’m all about selling stock options to jack that income way up.
So, what sort of yield could we have achieved yesterday, just after the results came out?
Well, at the time, BP shares were selling at 545p each and I could have sold a cash-secured put contract with a strike price of 540p and a September expiration date, for £150.
That would have meant committing to buy 1,000 BP shares at 540p each — that’s 5p cheaper than they were trading — at any point between then and the 20th September.
Oh, and for that commitment, I would have been paid 15p per BP share (£150 in total). So, for a 52-day commitment, that equates to an annualised yield of 19.2%. And you thought the forecast dividend yield was impressive…
And of course, that 15p premium could be used to offset any drop in the BP share price. If fact, you would still be in profit at any point down to 525p.
And the risk?
Well, BP shares could obviously fall further than that, in which case you’d be sitting on a paper loss and stuck with owning shares in a dividend gusher. That’s hardly a big deal for an income investor.
In addition, you could then begin selling covered call contracts on the same BP shares to boost the income again.
Or, the share price could take off and you’d miss out on picking them up ‘on the cheap’. Oh dear. Hopefully, in that case, the £150 you were paid for selling the put makes you feel a little better.
Third Friday Ltd are not regulated by the Financial Conduct Authority and the FIRE Revolution training programme is purely educational in nature. Under no circumstances do we provide any financial trading or investment advice. Any examples used are for educational purposes only and should never be construed as advice. We accept no responsibility for any investment losses you may incur. Please consult a financial advisor or other qualified professional if you are in any doubt as to the suitability of the strategies we teach.