Retirement Strategy: Let's Make Some Money For The Holidays With Options

by: Regarded Solutions

Before we know it, the cooler weather will be here, and the advertising for the holiday buying season will begin to hit us. For those of us who are already retired, it is always the time of year where money conflicts could arise.

How much can we afford to spend on the kids, the grandkids, and maybe each other? We have been handling our finances well with our dividend growth strategy, and "Team Alpha" has been doing just fine.

We do not want to sell any positions right now, nor do we want to use our income frivolously. We do however, want to have a fun holiday season. Of course that will take a few extra bucks.

Writing Covered Calls

Our portfolio now consists of: Exxon Mobil (NYSE:XOM), Johnson & Johnson (NYSE:JNJ), AT&T (NYSE:T), General Electric (NYSE:GE), Annaly Capital (NYSE:NLY), Southern Company (NYSE:SO), Procter & Gamble (NYSE:PG), Intel (NASDAQ:INTC), Realty Income (NYSE:O), Coca-Cola (NYSE:KO), Bank of America (NYSE:BAC), American Capital Agency (NASDAQ:AGNC), Wal-Mart (NYSE:WMT), Cisco (NASDAQ:CSCO), 3M Company (NYSE:MMM) and Bristol-Myers Squibb (NYSE:BMY).

By writing covered calls on our holdings, we can generate additional cash. We can also actually hedge our positions by a small amount, but we could also have our shares called away. We need to remain vigilant, and take steps to ensure that we protect our positions, as well as collecting any dividends that our stocks will pay.

That might include buying back an option, rolling them over to other expiration dates and strike prices, or letting stocks that we can buy right back on the next trading day be called away. Those strategies can be taken right up until the final day of trading, prior to expiration, in 99% of the cases. For our purposes right now, we can wait.

That being said, selling calls is a low risk strategy that can give us immediate cash to spend as we see fit. I like doing this at this time of year so I do not have to touch the dividends, nor sell any shares to pay for most of the holiday shopping I plan to do.

I have a rather strong list of calls that offer a decent premium on most of our stocks, so let's take a look at the actions we will be taking.

Sell Calls Cash Rcvd Stock #Shares
Oct 92.50 50 XOM 100
Oct 70.00 34 JNJ 100
Nov 39.00 27 T 100
Nov 23.00 14 GE 100
0 0 NLY 300
Dec 10.00 63 BAC 300
Oct 70.00 30 PG 100
Nov 40.00 20 KO 100
Nov 47.00 62 SO 200
Oct 25.00 44 INTC 200
0 0 O 150
0 0 AGNC 150
Dec 77.50 77 WMT 100
Nov 21.00 52 CSCO 200
Oct 95.00 42 MMM 100
Dec 36.00 22 BMY 100
Tot Cash 537 Cash Rsvs x
Click to enlarge

The first column is the month the call expires, usually the 3rd Friday of the month. The number next to the month is the strike price that we are selecting. If we hold the option position until the expiration date, then the stock will need to be above the strike price to be called away. If it dips or does not reach the strike price, then the options expire worthless, and our stock positions remain intact.

The third number is the amount of cash (less commissions) that we "pocket". Commission rates for option trades vary, but let's say for arguments sake that we spend $100 on all the trades. We still net $437 for our holiday spending spree.

Selling Puts

Another cash generating strategy with options is to sell puts on positions we want to add to our portfolio (or increase existing positions). For example, we would like to add another 100 shares of AT&T, but we only want to pay $35.00/share. We could sell the November put options and receive $39/per contract (per 100 shares) just to add at the price we want to. If the price does not drop, we still keep the premium and can do it all over in the months ahead.

If the stock price drops to $35 (or less) the shares will be added to our account automatically and the cash will be taken directly from our cash reserves. The two issues we face are:

  • We do not keep vigilant and the share price tanks to well below $35.00. If we did not take action we will own the shares at $35.00, which could be greater than where the price would be if we took action.
  • Selling puts needs to be approved by your brokerage and they will "freeze" cash (or margin) up to the value of the purchase price of the shares until the option expires worthless, or the shares are assigned to you, or if you take action to close the option position prior to their expiration.

In either case, selling options on existing positions is a rather low risk strategy that could increase the value of your portfolio, or give you some spending money for a happier holiday season.

Disclosure: I am long GE, JNJ, XOM, KO, SO, T, CSCO, INTC, MMM, BMY, WMT, BAC, O, NLY, AGNC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.