Income investors have long bemoaned the fact that Google, (GOOG), like many Tech giants, doesn't pay a dividend. But, with Cisco, (CSCO) and even Apple, (AAPL), joining the ranks of dividend paying stocks over the past year, Google's adamant no dividend policy seems out of step. However, according to Google's Investor Relations FAQ answer about dividends, "We have never declared or paid a cash dividend nor do we expect to pay any cash dividends in the foreseeable future."
There are many reasons that Google doesn't use some of its big cash hoard to pay dividends - Management believes it can deliver a better rate of return on this money, via acquisitions; Management believes in the old Tech non-dividend tradition; and, a lot of Google's cash is trapped overseas, and they'd have to pay a big tax bill to repatriate it, in order to pay dividends.
So, you want to invest in, and create income from Google now, without waiting for management to change its mind some day in the distant future?
Here's how to do it - sell Google options. There are 2 basic approaches you can take here, selling Covered Call Options and selling Cash Secured Put Options. (We've listed 4 actionable trades further below.)
First, a few basic option selling concepts:
1. The further out in time your option expires, the more money you can sell it for.
2. For call options - the further above the stock's price your call option's strike price is, ("out of the money"), the less money you can sell it for, and your underlying stock shares are less likely to be assigned/sold away at expiration.
If the stock rises above your sold call's strike price near or at expiration, your underlying shares will most likely be assigned/sold, BUT, you still retain the call option premium money you received when you sold the covered call. (In general, options tend to be assigned closer to their expiration date.)
3. Covered call sellers receive dividends, put sellers don't. Covered call sellers own/buy the underlying stock before selling call options, whereas cash reserved put sellers don't necessarily own the stock, but their broker will reserve cash against the trade. (More below)
4. For put options - the further below the stock's price your put option's strike price is, the less money you can sell it for, and you are less likely to, be assigned/have to buy, the underlying shares at expiration.
If the stock price falls below your sold put's strike price near or at expiration, you will most likely be assigned/sold the stock, BUT, you still retain the put option premium money you received when you sold the put.
5. Each option contract corresponds to 100 shares of the underlying stock.
6. You receive the money, (premiums), from options sales within 3 days of making the sale, often even the same day.
7. Option sales are always treated as short term capital gains, even if they're held for over 1 year. However, if you sell options which expire next year, 2013, and hold them until 2013, for example, you won't have to pay taxes on them until 2014.
Covered Calls - Here are 2 trades from our Covered Calls Table, which illustrate the concept of how the same option strike price's premiums vary by Expiration month.
The March 2013 $640.00 call pays $50.10, vs. only $37.50 for the shorter December 2012 call. The higher price for the March results in a lower break-even of $584.90, vs. $597.50 for the December call. However, the March option has a lower annualized yield, due to the longer time period of this trade.
(Both of these call options are $5.00 above GOOG's price, which would mean an additional $5.00 gain if your shares get assigned, which equals the difference between the call yield and the total potential yield.)
Cash Secured Puts - These 2 trades, from our Cash Secured Puts Table, highlight the differing payouts between strike prices that are further below the underlying stock price, i.e., "out of the money".
In this strategy, when you sell 1 put option, for example, your broker will reserve 100% of the value of 100 shares of the underlying stock, times the put's strike price. Therefore, in the first trade, your broker will reserve $63,500.00 in your account against this trade, (100 x $635.00).
The $635.00 put option is "at the money", i.e. equal to GOOG's $635.00 price, whereas the $620.00 put is $15.00 below GOOG's $635.00 price, "out of the money". Selling cash reserved puts further out of the money is a more conservative approach, in that your lower break-even gives you more protection against a drop in price for the stock. The more aggressive $635.00 put offers a higher premium, $41.70, than the $35.10 offered by the lower $620.00 put:
Disclaimer: This article is written for informational purposes only and isn't intended as investment advice.