Before I get to the important meat of this article, I feel compelled to point something out.
I published two articles on Apple (NASDAQ:AAPL) Monday morning on Seeking Alpha. Both received roughly the same number of pageviews; however, the bearish one collected more than 100 comments in two hours. Most were not very kind. The other, which illustrated how investors with considerable stakes in the stock can make themselves even wealthier using options triggered five responses in the same timeframe.
Bottom line - AAPL investors are tipping that dangerous scale as they move from smart investors riding the upward momentum of a great company's stock to an emotional cult that runs the risk of seeing massive gains turn to considerable losses overnight. If I wrote an article arguing that AAPL will soar to $2,000 by year's end and Tim Cook would be named Prime Minister of North America, many of the most hardcore bulls, without a doubt, would respond favorably without the least bit of skepticism.
That leads me to the meat and one of the many things I absolutely love about growth and income investors who position their portfolios, for the long-term, in dividend-paying stocks. They tend not to get too high or too low. They do not treat investing like sport, getting all rabid in defense of their favorite. Instead, the process is really a means to an end, not a jackpot they were lucky enough to hit.
In the AAPL article about earning what, to some, can represent more than a second income, I outlined a strategy that could yield approximately $10,000 every two months on 1,000 shares of AAPL via covered call income alone. I did not even include the additional firepower Apple's recently-announced dividend will provide.
A reader who emailed me asking how to handle his 1,000 shares of AAPL with options inspired the article. As a few others pointed out privately, not everybody is lucky enough to be sitting on 1,000 shares of AAPL. That's well over half a million dollars. Imagine having that base from which to reinvest dividends and write covered calls.
While that situation definitely exists - and certainly among some in the Seeking Alpha readership - it makes sense to consider the benefits the same strategy can produce but on smaller amounts of a less lofty stock.
Plenty of investors own Microsoft (NASDAQ:MSFT). It's one of those heritage stocks. And it's probably not uncommon for a good number of people to own somewhere around 500 shares. Let's look at the potential income-related outcomes of writing staggered covered calls against that MSFT stake, using prices in the final hour of trading on Monday with the stock trading at $32.03.
Written Covered Call
Jan '13 $35
Jan '13 $36
Of course, these numbers pale in comparison to what you could earn using this approach even on near-term, OTM AAPL calls, but it still shows the income-generating potential of combining the use of covered calls and dividends.
Remember, MSFT pays a dividend of $0.80; therefore, each year 500 shares produces $400. If you write additional calls as each of the ones mentioned here expire, you can easily double that dividend with options income.
While you do run the risk of getting your shares called away, you will have the capital to get back into MSFT directly on a dip, by writing a cash-secured put or just diving right back in at market price. I do not consider getting shares called away a risk of writing covered calls. I only write calls with strikes that represent a profitable exit price on my original stock trade. Plus, you can choose the sets of strikes and expirations that suit your sentiment and expectations and alleviate any concerns.
I am more than happy to collect income and run the "risk" of collecting proceeds, which include capital gains on a winning stock trade, to reenter the same stock or buy something else.