The Skinny On Options Data Science

Max. ROC on Covered Calls (w/ Spreadsheet)

| Sep 8, 2016
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    The Skinny On Options Data Science

    Max. ROC on Covered Calls (w/ Spreadsheet)

    Sep 8, 2016

    SPREADSHEET LINK
    Click here for a link to the spreadsheet used in the show.


    Yields on Treasury and Corporate Bonds are at or near all time lows. This has led many to buy Junk Bonds and dividend paying stocks in a search for yield. So how many shares do I need to make specific dollar amount per month in dividends and what strategy(s) should I employ? The head of our research team, Michael Rechenthin, Ph.D., aka Dr. Data, is here with an answer and provides a very useful spreadsheet for understanding the probabilities of the assumptions made regarding his answer.

    An example was given of a $50 stock and a 3% dividend yield and a desire to make $100 per month. The calculation was 12 (for 12 months in a year) multiplied by $100 then divided by the result of the share price of $50 multiplied by the dividend yield. The result is 800 shares. Multiplying the share price of $50 by 800 shares results tells us that we would need to invest $40,000 to achieve our desired $100 per month. Dr. Data noted that this has nothing to do with outright principal risk.

    The $40,000 figure is substantial. Can we use options to enhance our returns so less capital is required? An example of selling option premium against the long $50 stock portfolio to enhance returns was displayed. We turned our long stock into a Covered Call by selling Calls with a strike price 2% above the current stock price. Doing so would add up to $284 to the $100 monthly return from dividends. Mike then addressed the possibility of returns being further enhanced through stock appreciation and the formula for calculating the probability. The calculations were all displayed. Since the strike price used would be $51 (2% greater than the current $50 price) the most we could add through stock appreciation would be $800 and given an Implied Volatility (IV) of 17 there was a 37% chance of that occurring. Tom remarked that, “another thing this strategy does, is it changes your breakevens, reduces your cost basis on the stock and improves your probability of success.”

    Dr. Data displayed and explained his Covered Call Calculator a simple to use and elegant bit of software. The calculator included the stock price, monthly Implied Volatility, option contracts, call strike, credit received, Days To Expiration (DTE), max earned through appreciation, max credit received, maximum return and maximum annualized Return On Capital (ROC). Mike added that because we know that IV usually overstates the expected move, the odds end up better than the spreadsheet prediction.

    Watch this segment of Skinny on Options Data Science with Tom Sosnoff, Tony Battista and Dr. Data, aka Michael Rechenthin, Ph.D., to see how a portfolio built around dividend yield can be enhanced through options and how to calculate the potential returns.

    This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.

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