Are Your Options Paying You “Dividends”?
Everyone knows that options don’t pay dividends, right?
Well, not so fast…
The market pays out to those who know how to work it. And in The War Room, we know how to work it!
Over the past week, while the market was rallying, War Room members didn’t sit still on a couple of our Long-Term Equity Anticipation Securities (LEAPS) options positions…
Members own the January 2022 options on both Diebold Nixdorf (NYSE: DBD) and Cleveland-Cliffs (NYSE: CLF). With almost two years left on these options trades, members have choices that short-term options traders don’t have.
With so much time, we can generate income from these trades while waiting for the underlying shares to move higher. That income is similar to a dividend, however, there is one catch… In order to receive it, you limit your upside.
Let me explain…
For example, take stock XYX, which is trading at $4.50. Instead of buying the stock, you buy the $7 LEAPS options expiring in 2022, which are trading for $1.10. In this type of market, there is a lot of choppy action but no real direction. What we are seeing is high volatility, and that volatility increases the premiums in options.
So in this case, members looked to the January 2021 $10 options – remember, they already own the January 2022 $7 options. These January 2021 $10 options are trading for $0.40.
Members sold the January 2021 $10 options against the January 2022 $7 options. When you sell an option, you receive the cash, $0.40 in this case. That’s more than 36% of the initial entry cost.
However, by selling the $10 options, members must give up their options at $10 if the shares trade above that price at expiration. If not, they keep the original options and would have another full year before expiration!
Now, what would happen if the shares closed at $10.01 at expiration?
Well, the cost of the trade is now $0.70, and the spread between the Jan 2022 $7 option and the $10.01 underlying price is $3.01. That means, if members wanted to give up their position, they would make a minimum of $3 less the cost of $0.70, or a 4-to-1 return.
Alternatively, members could buy back the $10 option for a penny and keep their original position intact (at a cheaper cost).
Members now have three choices…
- Sell another option
- Hold the position open until January 2022
- Cash it in!
Action Plan: Ask yourself… Are my options paying “dividends”?
Join me in The War Room and learn how to add a new weapon to your investing arsenal!