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Richard Berger
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Mr. Berger is the creator and developer of the YDP screening tool, a chart system and its analysis for screening and monitoring dividend income equity investments. The recipient of Seeking Alpha's Outstanding Performance Award (... More
My company:
Income From Covered Option Writing
My blog:
Income From Covered Option Writing
View Richard Berger's Instablogs on:
  • A Checklist For Getting Started With Covered Option Boosting

    Many Seeking Alpha readers ask me about options in general and covered option writing as I use it in my program. I have reproduced a reply to such a user here that I believe is a good starting point for those not completely familiar with options and covered option writing...

    I suggest beginning by reading my brief option primer in my SA blog

    http://bit.ly/1DsX9a4

    On my blog, you will also find several example Premium Research Articles that I have released to the public as examples of what we are doing in my program and the information you, as a subscriber, will receive. You will also find most of my body of public articles here on SA is about the same thing as my 3 part program. 1). Identify quality dividend income equities with reliable dividends you want to own. 2). Identify the fair value price of these shares (the price below they are a bargain and above which they are over priced, and 3) Use covered options to boost the income while lowering market risk. ONLY write the covered options on stocks identified by #1 and using Strike prices that fit with #2.

    http://bit.ly/QgNcV9

    http://bit.ly/1BaRxAb

    http://bit.ly/1iNIJnz

    Then you may want to take time to more about options from various web sites (Google for option trading tutorial). One good website I find is

    http://bit.ly/1GXyMBu

    I hope you find this a good starting point for exploring the use of covered option writing to boost income and lower market risk. Feel free to message me with questions that may come up in your studies.

    Richard

    Aug 06 8:18 AM | Link | Comment!
  • PG Plunge Has Investors Asking. I Answer.

    The recent plunge Procter and Gamble has shareholders and investors asking what to do. My subscribers have been making oversized income exceeding 9% annual yield while reducing market risk in their exposure to PG.

    I am now releasing here my May 6, 2015 Premium Research article from Income From Covered Option Writing which includes an in depth evaluation of the company and this income generating, risk reducing option boost strategy approach.

    The current valuation, market level, outlook, and option boost strategy opportunities make PG an excellent candidate for oversized income right now. I have just presented a new article featuring Procter and Gamble with boost strategy to start of my August Premium Research presentations. This Dividend Zombie which was introduced in part 3 of that series, last November, will feature strongly in all markets as a solid investment with oversized income boosting on a reliable underlying dividend.

    Without further commentary, below find my May Premium Research PG article.

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    3.28% Dividend, 9.29% Below Fair Value, 9.03% Covered Option Boost

    May 06 1:20 AM (Updated on May 06 1:27 AM)•PG

    Disclosure: The author is long PG. (More...)

    Summary

    • Company: Procter & Gamble (NYSE:PG).
    • Current Price: $80.07.
    • Option Write Available: Cash Covered 10/16/15 $80.00 Put @ $3.10 premium on 163 day contract. ( Yield on Covering Cash: Absolute: 4.93%, Annualized: 9.03% ).

    (image source: swamplot.com)

    Last October, I introduced The Zombies, 8 companies that can not be killed, survivors of over 100 years with unbroken and undiminished dividends. These companies belong in the core of virtually every portfolio, especially for conservative income investors. If you have not yet read my Dividend Zombie Series, I urge you to do so.

    Brief Discussion:

    Procter & Gamble (NYSE:) is one of these zombies. I discuss it in Part 3 the series and in an earlier March 18, 2013 article. While I urge everyone to consider all the zombies for their portfolios, I do caution that they have to be chosen at the right price. Even Zombies get over-priced at times. YDP analysis shows PG to be trading a solid 9.29% below fair value at this time. However, analysts and technical charting see continued weakness ahead. I therefore have looked at the option strategies available with an eye towards income, yield rate, market risk, and potential lost opportunity in order to come to reach a conclusion on which strategy(s) to present here.

    YDP Analysis & Appraisal:

    Not surprisingly, the YDP picture remains as it was last October. I simply reproduce it here with the updated current chart.

    A YDP analysis of Procter & Gamble shows the market has agreed on a solid 3.0% yield rate (with a variance channel bound by about 2.85% to 3.25%) since the 2008 financial crisis. Prior to that, a long-term trend stretching back to 1990 shows 2.0% was the pre-2007 prevailing trend. This sudden quantum jump of one full percentage point in yield reflects the macro environment change post-crisis. Investors perceive greater general market risk and demand higher yield from their income equities today. The emergence of popular tax-efficient income vehicles such as REITs and MLPs has also put pressure on traditional companies, which results in higher yields to compete with these new alternatives.

    At 3.0% yield, Procter's fair value price on its current $2.648 annual distributions is $88.27, $8.20 ($9.29%) above current market price.

    (click to enlarge)

    Technical Chart Review:

    Unlike the YDP chart, the trading momentum and technical chart has greatly changed since my last presentation in November. The breakout which had just occurred 1 day prior to my writing then continued and surged ahead from $85.54 to ultimately form a head & shoulders top peaking $93.89 on December 24, 2015 (merry Christmas!). Headwinds from declining organic revenues and adverse forex translations in the face of the strong USD resulted in a completion of the H&S top and a breakdown, placing the shares into a declining channel trend that continues at present. On April 24th, shares fell through a important support level at $81.00. This price is now a resistance level which shares tested a few days ago and failed to rise through, rapidly falling back to the present $80.07. In the absence of any significant upside surprise, shares have little prospect of rising above the low $80's anytime in the current quarter and can be expected to drift below $80.00 by late July as the company goes ex-dividend. This down-drift is likely to continue until prices test the $77.00 support level.

    (click to enlarge)

    In summary, PG shares are in a very weak technical momentum and fundamentals provide strong headwinds which will probably take several quarters to work through as internal restructuring of the company product lines continues and macro economics turn back to favorable. One possible bright spot on this doldrums picture are the signs European economies are beginning to show evidence of strengthening from the initial ECB round of quantitative easing. This coupled with weakening of the US economy suggests a turn in the $USD strength may be coming soon, improving forex translations for the company.

    The continued outlook for weak performance suggests we focus on income, coupled with avoiding market downside risk at this time. I have examined the option chains with this in mind. Premiums on covered calls at the from "in the money" to "at the money" and "out of the money" all show very small absolute and annualized boost potential. At the same token, cash covered puts at the money ($80,00 strike) offer some attractive income and yields more than double the dividends. I therefore have selected to focus on the Puts for a current strategy. I also include the most attractive covered calls, although the boosts are limited and the selected two straddle fair value.

    Current Covered Option Strategy:

    I have created the chart shown below of at-the-money $80.00 Strike Put contracts available to show a comparison of the premium income, yield rates, and potential effective basis prices available mapped out over time. With all of the factors discussed above, I am selecting a strategy to write cash covered 163 day 10/16/2015 $80.00 Put with $3.10 premium. This provides $310/contract immediate cash, a 4.03% absolute (9.03% annualized yield) return on covering cash. In the event shares are presented, the effective basis price is $76.90. This is $3.17 (3.96% below current market) and $11.37 (12.88%) below fair value. This basis would also be below the strong long term support level present at $77.00 and thus represents a strong reduction of market risk while the on-going company turn-around is in progress and a potential broad market correction is anticipated by some.

    Summary of At-The-Money Put Options for PG
    Contract Expire DateDays To RunStrikePremiumAbsolute Gain %Annual Gain %Effective Basis Price
    5/22/1516$80.00$0.600.76%17.24%$79.40
    6/19/1544$80.00$1.361.73%14.46%$78.64
    7/17/1572$80.00$1.812.31%11.74%$78.19
    10/16/15163$80.00$3.104.03%9.03%$76.90
    1/15/16254$80.00$4.255.61%8.06%$75.75

    For those who already own shares or wish to make a market buy-write at this time, 2 covered call contracts offer a modest boost while providing significant capital appreciation upside beyond the current $80.07 market to near or above fair value. These are:

    Write the Covered Call 163 day 10/16/2015 $85.00 contract for $0.90 premium. This is a 1.14% absolute boost (2.55% annualized) with a basis adjusted from current market of $79.17. If called away, profit includes the 2 dividends of July and October of $0.663/qtr (unless early exercise captures October) plus $5.83 intrinsic gain (total of $7.156/share). The call-away return is 9.04% absolute (20.24% annualized).

    Alternatively, write the Covered Call 254 day 1/15/2016 $90.00 contract for $0.55 premium. This is a 0.69% absolute boost (0.99% annualized) with a basis adjusted from current market of $79.52. If called away, profit includes the 2 dividends for July and October plus $10.48 intrinsic gain (total of $11.806/share) The call-away return is 14.85% absolute (21.34% annualized).

    (click to enlarge)(click to enlarge) Closing Thoughts:

    This dividend zombie belongs in your portfolio. However, given the market environment, technical weakness, low covered call boosts, and high reward on the Put premium yields (more than double the dividend income), the cash covered puts are the strategy of choice for this point in time. The exception may be if you already own the shares and wish to continue the long term hold and dividend harvest with a minor income and yield boost along with strong upside gains to compensate for any call-away risk.

    As always, I invite and welcome comments and suggestions to answer questions and make this service serve your needs in the best possible ways.

    Remember to feel free to contact me by message or here in any of the comment threads if you need an update on any of these option pricing for this month.

    I am not a licensed securities dealer nor advisor. My work presented here is specific and actionable but should be considered as analysis only and not taken as investment advice. As always, each investor should weigh the suitability of each analysis presented and do your own due diligence as you feel appropriate.

    Richard

    Here's what my subscribers are saying about the Premium Research, "Income From Covered Option Writing"

    When The Student is Ready, The Teacher Appears ...

    Denisa•Jul 15 3:46 PM

    I love it

    Richard Berger has helped me view investing in a whole new way: As a winner, instead of a loser. Why not make additional money from the investments you already own, or can purchase at a discount, especially when there is no way for you to lose? Richard gives personal attention to my questions and presents several investment scenarios which allows me to choose according to my comfort level. I am glad to have discovered him and already have covered the cost of my subscription and then some. They say, "When the student is ready, the teacher appears." Thank you, Richard, for your dedication to client satisfaction and to teaching this novice student what I needed to know in a way I can understand.

    ---------------------------

    Happy Subscribor

    Ed Hannon•Aug 01 12:02 PM

    I love it

    I've just joined the program and have already recouped my subscription price in less than a month and with only 2 trades, over 4x the subscription price. In my opinion this program is more designed for the income investor vs. the speculator or momentum investor, this puts the dividend income " on steroids" with Richard's income boost selections. A new subscriber should have a basic understanding of Options and understand the terminology, Richard has an article describing Options and how he deploys his covered calls and put strategy. I strongly advise a new subscriber to do their homework and read Richard's tutorials. His program is intuitive and makes sense as you will enter trades at reduced prices in companies that are" Aristocrats" and household names with long histories of paying and increasing their dividends. This program is unique and best of all when you have questions Richard responds promptly with a clear explanation, I consider service after the sale extremely important and Richard delivers. I believe tRichard's approach will make money and I'm very pleased I've become a student. The subscription price is well worth the investment. Happy Subscribor Ed.

    income frome options

    ----------------------

    stanall•Jul 31 1:28 PM

    I love it

    hi Richard First thanks When I write you concerning a question not only about the situation at hand but a general question about options your response is timely and the clarity is excellent. You must have been a writer of some sort of manuals in your previous career. But lets look at my numbers.My option income year to date is in excess of what I did all last year. And would have been far better if my confidence and understanding was at the level it is today. Looking forward to more trades and learning experience. Stan newton

    Aug 05 12:28 AM | Link | Comment!
  • Income From Covered Option Writing -- Subscriber Feedback

    This is a place for subscriber feedback for members enrolled in my Premium Research - "Income From Covered Option Writing"

    Below, I share the feedback I have already received from my participants during our first few months. If you are an income focused investor (or blended growth and income), then I hope you will consider giving my Premium Research a try.

    Thanks, Richard Berger

    Subscriber Feedback:

    Richard,

    You were kind enough to explain to me how to get involved in covered call writing about a year ago. Since then I have generated over $23,800 in call writing and have been very conservative. I expect to generate between 33-38,000 this year alone. I am anxious to learn more from you and to utilize your strategies on Puts as well as Calls.
    I am excited to join your service as you have already more than paid for my subscription out of kindness.
    Thanks and heres hoping for an awesome year.
    Signed .. GT

    ------------------------------------------------------------

    Richard,

    Excellent analysis as always!
    Signed PP

    -----------------------------------------------------------

    Now I know why you are travelling the world and I live in suburbia!
    Signed PP

    -----------------------------------------------------------

    Thank you Richard. I am learning a lot from your wisdom.
    Signed PP

    -----------------------------------------------------------

    Richard,

    As a new subscriber, I am very impressed with the results so far
    signed TL

    ------------------------------------------------------------

    When The Student is Ready, The Teacher Appears ...

    •Jul 15 3:46 PM

    I love it

    Richard Berger has helped me view investing in a whole new way: As a winner, instead of a loser. Why not make additional money from the investments you already own, or can purchase at a discount, especially when there is no way for you to lose? Richard gives personal attention to my questions and presents several investment scenarios which allows me to choose according to my comfort level. I am glad to have discovered him and already have covered the cost of my subscription and then some. They say, "When the student is ready, the teacher appears." Thank you, Richard, for your dedication to client satisfaction and to teaching this novice student what I needed to know in a way I can understand.

    Signed D.

    ---------------------------------------

    Thanks Richard. BTW, earlier in the week I opened to sell 20 contracts. If the shares actually appreciate, which I doubt given the spanking the market took the last couple of days, I will be happy to be rid of them at a considerable profit should they find themselves in the money and if not, I've covered your subscription for several years in my first month. You are my very greatest discovery. I didn't do anything with my BRK.B stock yet - I think I'll pick up some more for an even 400 - so if you have any thoughts on that subject, please let me know.

    signed D.

    NEW|25 Jul 2015, 01:38 PM

    Jul 15 5:15 PM | Link | Comment!
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  • $0 .. Interested in entering a position or yield boosting O? I am offering a free copy of my new Research. Msg me to w/email to request
    Aug 8, 2015
  • $PG - I just released to the public an Research article on PG that readers may find useful at this time. http://seekingalpha.com/p/2j4el
    Aug 5, 2015
  • $PG. I just released to the public an Research article on PG that readers may find useful at this time. http://seekingalpha.com/p/2j4el
    Aug 5, 2015
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