No dividend? No problem. Using a simple options strategy, you can extract short-term income from even non-dividend paying stocks.
The strategy is known as a covered call, and it's blessedly simple. You sell ("write," in options parlance) call options on a stock you own. When you sell the call option, you get paid a premium up front. If the stock has fallen below the option's strike price at expiration, the premium becomes much like a dividend—a way of getting paid for holding your shares. If the shares have risen above the strike price at expiration, you still keep the premium, and you must sell your shares at that price.
In this way, covered calls are a great way to guarantee yourself near-term income, in exchange for giving up some upside if the stock happens to take off in the short term.
Even better, options markets are often less efficient than the markets for their underlying stocks. Sometimes, savvy investors can find options offering great deals. For example, here are three stocks with call options currently offering a dividend-yield-equivalent of 14% or more.
Yield 23.8% on Sony
Shares of electronics company Sony
Yield 14.2% on Amazon
Investors in Amazon
Such investors are in luck, because Amazon's July 2011 $200 calls currently offer a $2.24 premium, or the equivalent of an annualized 14.2% yield at today's stock price. This yield is locked in if the shares remain below $200 (5.3% above the current price) on July 15. If not, covered call investors sell their shares for a 6.5% gain in 35 days.
Yield 20.2% on Las Vegas Sands
In just the past year, shares of casino owner and operator Las Vegas Sands
September 2011 $43 calls on Las Vegas Sands' stock currently offer a $2.00 premium, the equivalent of a 19.7% annualized yield. To reap that yield, shares simply need to do anything but rise more than 8.4% between now and September. And if shares do go on a tear between now and September (after all, this has been a volatile stock), covered call investors can placate themselves for missing out on the even-bigger upswing with the 13.4% return they will have realized in just three months.
How do you find these deals?
That's a good question, because there are thousands of stocks, and each stock can have dozens of options trading for each of a variety of different expiration dates. That's a ton of choices, and most would-be options investors must go through them manually, because options don't lend themselves to accessible screening tools.
One tool that is becoming accessible -- for a short time -- is Motley Fool Options, which is reopening for new members this week. The team at Motley Fool Options spends all day scavenging for the best options ideas, including covered calls, and then brings them to your fingertips. To find out more, and to receive a free copy of their Options Edge Playbook, simply enter your email address in the box below.
Alex Pape does not own shares or hold options positions on any of the stocks mentioned. Motley Fool newsletter services have recommended buying shares of Amazon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.