Time means money in dividend stocks
David Russell | [email protected]
The first trade occurred in EEP, with 2,600 December 27.50 calls bought for $0.65 and an equal number of January 27.50 calls sold for $0.20. That translates into a net credit of $0.20.
A similar transaction occurred one hour later in ED. About 1,900 December 55 calls were bought for $1.49 while 1,900 January 55s were sold for $1.79, resulting in a credit of $0.30.
Volume was below open interest in the December contracts in each trade, indicating that existing short positions were closed and rolled forward in time. Both strikes were also in the money, which would have forced the investors to sell shares when the options expire at today's close. Adjusting the expirations kept them in the trades for an additional month.
EEP's annual dividend yield is almost 8 percent, and ED's is more than 4 percent. Investors often hold such stocks to earn income and then sell near-the-money calls against them.
This reduces volatility and earns additional income but surrenders the right to profit from a rally. The result is a position that resembles a fixed-income investment. (See our Education section for more on how to turn time into money by selling calls and puts.)
EEP rose 1.4 percent to $28.24 yesterday, while ED advanced 0.07 percent to $56.44. Total option volume was 21 times and 8 times greater than average, respectively.