Although I get most all of my current investing ideas for DITM (deep-in-the-money) covered call writing from Seeking Alpha, my favorite print magazine is Barron's - for excellent writing, great insights and occasionally, actionable ideas. This week's edition includes an article by Michael Santoli about the weakness of Waste Management - a stock I've held since May 2011, in the DITM program. Following is why DITM is such a superior strategy for sideways to down markets.
I bought 200 shares of Waste Management (NYSE:WM) on May 24, 2011 at $38.40, just prior to the ex-dividend date, and immediately sold the $36 call option several months out for protection. The stock has dropped to $32 and rebounded to today's price of $35.56. Santoli feels it could drop another 10-15% for various reasons.
Along the way I have received dividends (which actually increased) and option premiums of of just under $2,000, while rolling down to the $32 strike price. I now am short the Oct. 19 covered call, so if it drops 10% the stock will probably get called away and my total return will be $700, while the stock dropped over 6 points for the 200 shares. That is more than a 9% return - annualized from the 17 month holding period it becomes 6.4%.
An investor only owning the stock would have lost $1290 less the $417 in dividends as opposed to gaining $700. That is not to mention the worry and uncertainty of holding the stock. If, as Santoli posits, WM drops 15% to $30, one could still own the stock, write a call above the stock at $32 (normal cc), and receive a higher % dividend - unless it is cut or eliminated, always a danger.
As for owning WM now, the Schwab rating is a neutral C, Standard and Poor's rates it 4 of 5 stars, and the 2012 low for the stock is only $31. Earnings are projected slightly higher, and should be released mid-October, just when the stock should be called away by the call option. Recently the dividend has also been increased, a good sign.
For more of my previous closed trades please go to:
Disclosure: I am long WM.