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2013issue C0352-53

Year-long covered calls on high-yield industrials

After the last session of the calendar year, a high-yield industrial list is funded for a full-year hold. The covered-call-write is struck near spot and dated to that same hold so dividend, premium, and strike-spot-adjustment can be read as one net-carry-cost procedure.

  • The year-end-yield-screen ranks thirty industrial-average names by dividend yield, funds the ten highest-yield names in equal dollar size, and holds that list for one year before the screen is repeated.
  • A lowest-priced-yield-subset takes the cheapest five of those ten names and keeps the same equal-weight, one-year calendar.
  • Monthly writes were set aside because the collected premium was judged too small; tenor-match sells a longer-dated call and holds it toward expiration.
  • Net-carry-cost is stock price minus expected dividend minus call premium, which on a 17.91 stock with 0.68 of expected dividend and 2.13 of premium equals 15.10.
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Current trackCovered call writing31 readingsOption income strategy43 readings

A once-a-year industrial sleeve

In this historical workflow the equity book is not refreshed month by month. After the last session of the calendar year, the year-end-yield-screen ranks the thirty industrial-average names by dividend yield, funds the ten highest-yield names in equal dollar size, and holds that list for one year before the screen is run again.

A lowest-priced-yield-subset is then taken as the cheapest five of those ten high-yield names. That shorter list is still funded in equal dollar size and is still held for the same one-year span.

Why the stock is held through the dividend cycle

Dividend entitlement requires ownership before the ex-dividend-cutoff, the session after which a new buyer no longer receives the next declared cash dividend. A full-year stock hold is used so the sleeve can sit through a complete cycle of declaration, record, and payable dates.

The write follows the stock calendar

Against each hundred shares the overlay sells one call struck as near the prevailing stock price as practical. That covered-call-write is held toward expiration rather than treated as a monthly income trade.

Monthly covered writes were set aside for this sleeve because the collected premium was judged too small. The intended write uses longer-dated premium so tenor-match can sit with the year-long stock hold.

Premium and dividend lower the entry cost

Combined entry cost, the net-carry-cost, is defined as stock price minus expected dividend minus call premium received. On a 17.91 stock with 0.68 of expected dividend and 2.13 of call premium, that cost formula produces 15.10.

Net income is first taken as dividend plus call premium. Strike-spot-adjustment then adds the gap when the call strike is above spot, or subtracts that gap when the call is in the money, before the figure is divided by the reduced cost.

A quarterly alternative

Selling successive quarterly calls is listed as an alternative to a single one-year write, at the cost of more frequent position maintenance.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
16 of 25 in the Covered call writing track
201439-39 pp.Next on Covered call writingYear-horizon covered calls on Dow yield ranksThe 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.
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 year201398 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