We’ve covered a lot in our Good Kids Trading (GKT) dividend series. If you missed the first or second articles, I encourage you to check them out! Today I’m covering a little more of the ‘advanced’ strategies. As I mentioned I still keep things pretty simple. This article is aimed at traders with a little larger account size (you really need to be able to trade 100 shares of the stock because we're trying to collect the dividend, and you need to understand options at the most basic levels. Don’t let this scare you, it’s really not that hard and we all started with small accounts.
I know this is obvious, but with options we are controlling 100 shares of the underlying and in these strategies below we are wanting to take ownership of the 100 shares to collect the dividend. I don’t always take the shares, or get put the shares, but I’m WILLING to own 100 shares and my account can support this without over leveraging myself. Risk management is key at GKT! My goal with these strategies is to not only collect the dividend by owning the shares, but essentially double or even triple the dividend by collecting the premium of the options as well as the dividend from owning the shares.
I start using the same information and strategies we covered in part 1 and part 2 of this series. I have my list of ‘favorites’ and I have support and resistance drawn out on the charts. Here’s where things get a little different, I don’t mind ‘trading’ some dividend names for some quick income instead of holding them in my long term account. I do both, I have longer term holds normally in my IRA's and I also like quicker trades where I’m not looking for huge wins, just get in and out and pay some bills. Everyone is different, you need to make your own plan, use some of the ideas here, and realize this doesn’t always work, in fact NOTHING ALWAYS works. Some trades will lose, its normal and you shouldn’t be afraid of losing just have a plan. If you haven't checked out the 10 things I wished I knew before I started options trading you should! There is no holy grail strategy.
I keep an eye on the upcoming dividends (this is referred to as the ex dividend date) I use my watchlist to scan through upcoming dividends. I sometimes use my broker to find non- dividend aristocrat names for a trade. If you want to know more you can ask me by joining our free discord, I’m looking for the same things we talked about in the second article of this series.
Is the stock at a good support level?
Does it have a good premium?
What is the risk/reward?
Are there any technical patterns like double bottoms, hammers, or moving averages to hold the stock up?
What does the options chain look like?
As math based traders we generally want HIGHLY liquid options. We write about this all the time at GKT, I will tell you right now, more than likely the dividend stocks aren’t going to be as liquid as we like for math based trades. I lower my expectations on liquidity here a little bit. Do NOT make trades if there is zero open interest, and don’t chase pennies and get steam rolled. You still want the options to be liquid, you just likely will not see exactly what we like with higher IVR/growth stocks. The volatility will likely lower, the premium might not be as good on the options. If you see high premium there is likely a reason, so I’m not saying don’t take the trades, just be aware that if you see way more premium than you expect there is a reason so try to figure that out before you get fancy. After I find some stocks with upcoming ex-dividend dates I create a plan. I normally look the first of the month and make a game plan for the month. Meaning I create a little watch list of stocks that I like and that pay a decent dividend. You should do the same!
Lets jump into several of the trade strategies:
So lets jump into a ‘longer range’ to ex-dividend first. I’m going to use examples because I think that helps illustrate the point better. Take a look at stock ALB it doesn’t have a huge dividend, but it’s a good example in terms of a longer DTE until the Ex Dividend date. This is the daily chart, the purple lines I added a while ago showing previous weekly support and resistance. As you see there is support at $172, and the stock is currently trading at $202. That is roughly a 15% drop (the ex dividend date is the blue circle).
This stock has weekly options as shown in the options chain below, you also see it has earnings this week so the premium is higher than ‘normal’, it’s up to you if you would take a trade like this over earnings (I don't normally do trades over earnings unless I don’t mind holding it a long time, and I understand it might be underwater a while.
If I were put shares of this stock it would be at a 15% discount, so I don’t mind entering this trade as I know I could sell calls against any shares I was put. Do not get caught up in the P/L of the put using this strategy, on paper your put can show a loss of 200% even more, focus on the outome. I wrote about this: Focus on the Outcome not the P/L
As you see below it pays a dividend after the Sept 8th expiration. Tasty Trade does a good job of showing this on the options chain:
As you remember we saw support around 172 and there is good premium in both the 175/170 stock (a lot of this premium is due to earnings, so it would normally be less in a dividend stock), the markets are wide, the open interest isn’t great at 170, so If I sold the 175 put. That would get me 2.35 in premium (picture below). The Dividend is .40 so this put would be 6 times what the dividend pays. The P50 (probability of this hitting 50% profit) is 95%. Worst case I’m saying I will own shares of ALB at around 172 a share. That price is right at support and in time to get the dividend. If the stock closes above, the put closes and I collected a 'dividend' type of income without holding the shares at all. You can set the GTC of the puts for 50% or even 75% if you really like the company and don't mind owning the shares.
This is just a simple strategy of selling puts in the expiration before the dividend in a company I don’t mind owning and letting probabilities work in my favor (does it always work, no, that 5% on the other 95% means there is a chance this trade doesn’t ‘work’.
If I were assigned these shares, I could sell a covered call on the friday I was getting put the shares Meaning if my put expired ITM and I was getting put shares I would go ahead and sell a covered call against my shares to collect extra premium.
Buy writes are something we often do in GKT’s discord. This is where you buy 100 shares of the stock before the dividend and you sell a covered call (generally in the same week).
Lets use stock VLO as an example. I could buy 100 shares of VLO for 126 a share, and then sell this weeks 127 for 1.02. The dividend is also 102 so this would essentially be like doubling my dividend. In this trade however I have no downside protection. So you need to have a line in the sand on where you take a loss or buy a put for protection. Or you agree to hold on for a longer time realizing you will be underwater. Buy writes can be a quick win, it’s not a lot of money but it is an income strategy that GKT often uses for stocks we don’t mind owning.
If you have increased IVR (volititly) in the underlying before the exdividend date you can setup a covered strangle where you are selling both the call and a put. If you don’t mind owning more of the stock if it pulls back this is a great way to increase your income. You don’t necessarily have to sell the put in the same expiration, you could sell the call in the weekly and the put in the monthly (the theta decay will be slower in the further expiration but you can sell further away from the money and collect more premium if you are willing to wait longer, but this is just another options you can consider. You can use the normal math based strategy of closing the strangle at 50% or you can let it go further. Make the plan your own.
When I hold a dividend aristocrat for a longer time period and I bought it off support I often times setup a collar or even a super collar.
Below an example on KO. This is a collar before earnings: (there is also 100 shares for each collar you sell)
So what I did here was I locked in my gains on KO no matter what. I capped my upside but I also prevented any losses. How you manage this depends on you. I often times will close the CC if it hits 50% of the premium I paid. And I will actually sell to close (STC) that long put for a win if KO pulls back. I consider that a way of ‘cash flowing’ the put so I’m making money on the put as my shares lose value, but I don’t mind holding KO for a longer period of time. If I get called away that’s ok as well, it’s a ‘risk’ I’m willing to take in most market conditions.
You can also setup a super collar for a bigger credit. This is just a put vertical with a covered call. This is what that trade would look like for KO. Below is what a super looks like in the broker (there would be 100 shares for each collar you sell).
So if KO went down to 55 over earnings, in this case I would sell my shares at 62.50 (with the long put), then I would rebuy the shares at 60 (the short put). I would keep the credit (again this only happens if KO is at this price when these puts expire. I’m again capping the upside, but to me these types of trades are meant to be quicker timeframes. I’m just looking to pay some bills.
There are many different ways to trade around dividend stocks, I’m just covering the most basic strategies. We have plenty more ideas and strategies in our discord.
I hope you enjoyed this series on dividend stocks, I make a consistent stream of passive income using dividend stocks. Some of these strategies in this article might seem confusing if you are new to trading, but I assure you that if I can do this you can too. Trading and discussing trades with fellow traders is way more fun and supportive, you should join our free discord. Happy trading Good Kids!
I'm not a financial advisor, I'm not a trained or certified professional. This article is for educational purposes, it is not trading advice.