Synthetic Dividend Yields

Other than the leveraged capital gain from buying options, selling options will generate premium which resembles dividend income, regardless of the underlying stocks paying dividend or not.  If the objective is to produce or enhance the annual yield of the underlying stock, investors can write calls or write puts in addition to relevant positions in the underlying stocks.

As put writers should always be prepared to buy back the stocks at “higher-than-market” strike prices, selling puts for income will make better sense if investors intend to own the stocks anyway.   In other words, the put premium received serves to reduce the cost basis of the stocks.  In order to keep the put premium or owning the stocks, investors should be bullish on the stocks.

As call writers should always be prepared to sell the stocks at “lower-than-market” strike prices, selling calls for income will make better sense if investors intend to sell the current overpriced stocks anyway.   In other words, the call premium received, other than like dividend income, serves to capture the overvaluation of the stocks.  In order to keep the call premium or selling the overpriced stocks, investors should be bearish on the stocks.

In either case, it stands to reason that the “synthetic dividend yield” generated from writing options are riskier than the actual dividend yield received from owning the stock.  Therefore, the option premium should exceed the expected dividend yield; say 2-3%, nowadays.

 

 

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