Selling puts on high dividend stocks

It’s tough right now to get returns above 1% a year right now without taking significant risks. For example ten year treasuries are running around 2% without much upside and a lot of downside.  Stocks paying dividends of 2% or more are common, but they will track a general downturn. Typically quality high dividend stocks won’t  decrease as much as other stocks in a downturn, but the losses can still be very significant. Individual stocks also carry company specific risks like lowering a guidance number, loss of a CEO or CFO, an analyst’s downgrade, etc.

High dividend paying stock ETFs are interesting because they offer relatively high yields (e.g., SDY, SPDR’s high dividend ETF is currently yielding around 3.5%) and have greatly reduced dependence on the ups and downs of individual companies.  I sold S44 Jan 2012 puts in my IRA at $0.95 for SDY when it was trading around $51.50.  If held to expiration this premium received would be the equivalent yield of around 1.85% per quarter.   Since these were sold in my IRA,  they required 100% cash reserve for the strike price value, or $4400 per put sold.

The risk of this approach is of course a market crash. It would take an additional 10% correction before the puts went in the money. If my puts were in-the-money at expiration I would probably let them be exercised and take the shares.  At that price the effective yield of SDY would be around 4%

The bid / ask spread when I made the trade was quoted as as 0.8 / 1.10. I put in a limit order at .95—the midpoint price—and it sold after a couple of minutes.

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6 thoughts on “Selling puts on high dividend stocks”

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  2. Yeah, this is why I have stayed away. It doesn’t make sense to me. My research tells me that the way they deliver that 20% yield is by buying government-guaranteed mortgage debt and leverage it up 7 – 8x, and distributing the spread between the two. I assume the risk is that some event blows the company out of the water, straight to zero.

  3. I understand the put-call parity business. Selling long term puts is a way of effectively getting the dividend without actually owning the stock. The question is how can AGNC get away with giving such a huge dividend? One principal of stock valuation is that the higher the excess return, the higher the volatility. Now clearly AGNC has huge excess return in that it is paying a 20% (taxable) dividend, yet its chart doesn’t appear any more volatile than the s&p 500 which is returning far less than 20% per year. The only conclusion I can come up with is that they are doing some risky things that are not reflected in the historical chart. Still, if you sell puts you get time value on top of the implied dividend, so seems like a deal to me…

  4. you’re selling a lower forward due to put call parity, you are short the dividend in this case… if they increase the dividend between now and expiration you lose that difference. fwiw

  5. Actually, it’s a result of arbitrage. If AGNC yields 5% a quarter and near the money puts cost a lot less than 5% a quarter, then you could protect yourself from capital loss and collect the dividends with very little risk. I suspect that is why the puts are very expensive, not due to any underlying expectation of the price behaviour of the stock. The question is why the price of AGNC doesn’t rise if the dividend is sustainable. My understanding is that when the price is significantly about their NAV, about $27, they raise capital and expand their asset base. I honestly don’t have a strong understanding of the internal workings of REITs like AGNC, but they make me nervous, which is why I have stayed away.

  6. I’ve sold Jan 2012 puts on NLY which is a REIT with a huge 15% dividend. Even with the recent drop in price, I’m still ahead. I guess with the huge dividends, people think that REITs like NLY, AGNC, and CYS must be ticking time bombs…


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