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2014issue C0139

Year-horizon covered calls on Dow yield ranks

After the last cash session of the calendar year, the thirty Dow industrials are ranked by dividend yield and the ten highest-yielding names are held with equal dollar weights until the next year-end. The covered write uses longer-dated calls so the overlay shares that one-year stock hold.

  • The year-end-yield-rank keeps the ten highest-yielding Dow industrials and funds each name with the same dollar weight until the next year-end rerank.
  • A lower-priced-subset of the five cheapest names inside that list follows the same equal-weight-year-hold.
  • Cash-dividend entitlement still turns on the ex-dividend-cutoff; declaration, record, and payable dates are the other three calendar markers.
  • The covered-write sells one call per one-hundred-share lot, and tenor-match replaces a monthly harvest because short-dated premium on these high-yield names was treated as too thin.
Entries in this reading3 entries
Current trackCovered call writing31 readingsOption income strategy43 readingsRank rotation76 readings

A ranking that already lasts a year

After the last cash session of the calendar year, the thirty Dow industrials are ranked by dividend yield and the ten highest-yielding names are kept. That year-end-yield-rank is the equity book the overlay later writes against.

Each selected name is funded with the same dollar weight and held until the ranking is repeated at the next year-end. The equal-weight-year-hold therefore lasts a full dividend year.

The five lowest-priced names inside that ten-name list form a nested lower-priced-subset. It follows the same equal-weight, one-year hold.

2013 Dogs of the Dow ranked by year-end dividend yield

The ten Dow names chosen after the 31 December 2012 close run from AT&T at 5.34 percent down to Johnson & Johnson at 3.48 percent. That ranked book is the equal-dollar equity held for the next full year. Yields are taken from the source ranking table, not estimated from a figure.
The ten Dow names chosen after the 31 December 2012 close run from AT&T at 5.34 percent down to Johnson & Johnson at 3.48 percent. That ranked book is the equal-dollar equity held for the next full year. Yields are taken from the source ranking table, not estimated from a figure.DJIA constituents selected as 2013 Dogs of the Dow · as of 2012-12-31 · 2012-12-31T00:00:00.000Z to 2012-12-31T00:00:00.000Z

Selection date is the 31 December 2012 close, the start of the 2013 one-year hold. The five cheaper issues are the small dogs in the source table; they are not plotted as a second series.

The cash-dividend calendar

Cash-dividend entitlement requires a long share position on or before the ex-dividend date. That ex-dividend-cutoff is the ownership test for the declared cash payout.

Declaration, record, and payable dates are the other three calendar markers. They do not replace the need to own the shares on or before the cutoff.

A covered write with a matching tenor

The overlay sells one call, struck at or slightly out of the money, against each one-hundred-share stock lot. In a covered-write the long lot covers the short call because the strike sits at or slightly above the market.

Short-dated calls on these high-yield names were treated as too thinly priced for a monthly harvest, so the write uses longer-dated premium to match the year-long stock hold. That tenor-match keeps the option overlay on the same calendar as the rank rotation.

In the 2013 ranking cycle used for the illustration, five names were treated as the qualifying set for the covered-write example.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
17 of 25 in the Covered call writing track
201436-37 pp.Next on Covered call writingCovered-call premium as a cost-basis cushionCovered-call writing pairs owned shares with a short call sold for a cash credit and a fixed sale price if the shares are assigned.
All readings on this track · 25 readings
  1. 1995Sequenced covered-call repair after a growth-stock drawdown
  2. 1996Covered-call writing as income and assignment discipline
  3. 1997Relative volatility rank for covered-call overlays
  4. 1997Covered call time, probability, and implied volatility
  5. 1999Covered-call income when implied volatility is cheap
  6. 2000Covered-call income and assignment flexibility
  7. 2002Covered-call expiration rate versus expected value
  8. 2003Covered-call versus diagonal housing after a single-name drawdown
  9. 2003Covered-call overlay on a stock portfolio as a payoff case study
  10. 2003Ratio backspread and covered-call assignment construction
  11. 2004Covered-call income is not a safety net
  12. 2006Evaluating consecutive covered calls across market regimes
  13. 2007A job-first audit of commodity options in a futures book
  14. 2011Horizon checks on Covered call writing, the risk-reward ratio, and the Relative Strength Index
  15. 2012From ex-date verticals to leftover buy-writes, and a call backspread that stays net long
  16. 2013Year-long covered calls on high-yield industrials
  17. 2014Year-horizon covered calls on Dow yield ranks
  18. 2014Covered-call premium as a cost-basis cushion
  19. 2014Monthly buy-write construction with traffic-light exits
  20. 2017Low-volatility covered calls need a real premium buffer
  21. 2017Covered-call futures income as one testable procedure
  22. 2018Partial covered-call overlays at targets, resistance, and rich volatility
  23. 2019Weekly covered-call writing as a two-book credit-spread case
  24. 2019Weekly option income as one holding-period case
  25. 2019Locking long-call profit with a temporary overlay
By fieldOptions and volatility171 readingsBy year201489 readings
All 31 readings tagged Covered call writing
Also on Covered call writing5 readings
1995Sequenced covered-call repair after a growth-stock drawdown1996Covered-call writing as income and assignment discipline1997Relative volatility rank for covered-call overlays1999Covered-call income when implied volatility is cheap2000Covered-call income and assignment flexibility