Don't Make the Dumb Money Trade on Intel, Sirius XM: Opinion
INTC yields 3% on a dividend per share of $0.84. On 100 shares, you'll make $84 annually in dividend income. So, what seems like small potatoes -- $103.60 in covered call income -- actually amounts to more than I make in dividend income. Let's not forget that along the way, I will be doing two things: Buying more shares on a regular basis and reinvesting both my dividend and covered call income into more shares of INTC.
Before you know it, I will own 200 shares of INTC and write two covered calls each time and collect double the dividend; and so on and so forth. In 10 or 20 years, you really begin to see the power of this approach.
Impatience trips up most investors. The early days of building a position and income reinvestment are the dog days. We see those "small" numbers and lose our resolve, opting instead to take flyers on other small numbers ("cheap" deep OTM calls) that have an incredibly low probability of paying off.
While that sort of speculation might not nip the INTC investor that much, it nails the penny stock crowd that pumps stocks like SIRI. If you buy a SIRI $3.00 call, you are on the wrong side of the trade. No question about it. Sure, instances will occur where you will hit a home run on this type of low-probability trade, but, more often than not, you made a sucker bet.
Instead of complimenting your 5,000 shares of SIRI with a lotto ticket, sell those $3.00 calls against the position. Or, better yet, notch the strike down to $2.50. You could sell 50 SIRI June 2012 $2.50 calls and collect $0.05 apiece for a total of $250, as of this writing. Even if you pay $50 in transaction costs, you still net $200. Do that three times a year and a stock that does not pay a dividend generates about $600 in income. You would need about 750 shares of INTC to trigger enough dividend income to match that.
If you plan on being long for the long haul, the primary "risk" associated with writing covered calls is losing your shares. If the underlying stock moves above the strike price of the call you sold between now and expiration, you could have your shares called away. You will almost certainly get assigned if the call is in-the-money at expiration.
As long as you select a strike to sell, that caps your gain at an acceptable level, I do not consider this a risk. I consider it an income generation method most investors probably miss out on for no good reason.
In an article later this week or next on TheStreet, I will outline what you can do if you fear getting your shares called away, or if that ends up happening.