An Opportunity At AT&T, Generating Additional Income Through Put Writing

Please note: This was originally posted on Substack, I'm sharing this here in its entirety as I know many investors here are interested in my thoughts beyond just closed-end funds and exchange-traded funds. This outlet would allow discussions on some options and other dividend stocks in a short format, less formal way!

It has been a while since I’ve done anything with options trading. In fact, I didn’t do any options trading throughout 2020 at all. Most of the volatility kept me on the sidelines as I typically enjoy put or call writing.

I’m not overly aggressive on utilizing options either. As most people that read me on Seeking Alpha will know, I’m most invested in closed-end funds or other dividend growth stocks. This is also why I’m inclined to use put and call writing as a way to generate “income” through collecting premiums. I would also say this is a more conservative approach to options as well, as I only use covered call writing or cash-secured put writing. A bit funny when I think about it because I have margin available on all of my accounts (of course, not retirement accounts like my Roth) - I just never use it. It is just kind of there, just in case.

(Source)

To help ease back into the option trading arena. I’m going with the classic AT&T (T). T isn’t just hugely popular with investors for its 7.22% yield - but also popular with option investors as well. It trades in a relatively tight range and that is exactly what makes it so great for not worrying about getting called away or being put the shares.

Yes, I’m going “basic vanilla” to whet my appetite again.

(Source - Seeking Alpha)

Of course, we should always anticipate being put the shares, just in case. After all, I would not enter the written put position if I didn’t ultimately feel okay with having the shares. That is the main risk here, being put the shares and the price collapses.

The Trade

The trade we did today was the contract for January 29th, 2020 at a strike price of $28. It was trading at $0.40, meaning that one could collect $40 per contract. This is against having to fork over $2800 if we are put 100 shares at $28 - or in other words a potential return of ~1.43% in 18 days. If we annualized this and could do this same trade every 18 days, this would work out to an almost 29% return.

This most likely won’t happen though - because one major thing is coming up on January 27th. Before the market open, T is going to announce their earnings. We are essentially getting a bit of a “bonus” due to this additional risk of volatility that an earnings report can cause. For example, if we did the options that expire on January 22nd (just 11 days) we would have only had the potential for a 0.61% gain. This is also because the fewer days, the lower the premium as an outcome is more likely every day we inch closer.

I do suspect that the earnings report will add volatility. Especially after they didn’t raise the dividend as they typically do in December. Looking towards more news on that front. They can still keep the dividend streak alive, because if they raise any time within this year then it will still count as a raise from one year to the next.

So, I’m going basic vanilla, but we have some adventure here too.

(Source - Seeking Alpha)

The market overall is also down today along with shares of T. That means premium rose today as well. That contract increased $0.06 today to get to that $0.40.

Essentially, our maximum gain is $40 - that’s it. Losses would start happening if T goes below $27.60 that is $28 minus the $0.40 per share we collected. $2760 is our maximum loss. This would happen if T went to $0 per share overnight. Yes, not likely to happen either!

Here is the other beauty of this trade. Let’s say we are put the shares, as long as the floor doesn’t fall out the bottom, we can turn around and write covered calls at $28 or above. Remember, I’m using cash-secured puts here, so I do fully intend to buy them if need be.