Dividend Stripping & Selling Cash-Secured Puts: A Real-Life Example with Walmart, Inc. (NYSE: WMT) – September 27, 2022
Whether we are selling stock options or buying stocks to accumulate dividend income, Blue collar Investors seek to generate cash-flow in a low-risk manner with capital preservation in mind. This article will highlight 1 way to combine selling cash-secured puts with dividend stripping.
What is selling cash-secured puts?
A low-risk option-selling strategy where the option seller agrees to buy shares at the strike price by the expiration date. The broker requires the seller to place a specific amount of cash into the brokerage account to secure that put sale and fund a possible future stock transaction. In return for taking on this contractual obligation, the option seller is paid a cash premium, the amount of which is dictated by the market.
What is dividend stripping?
This the practice of buying shares prior to an ex-dividend date (date shares must be owned in order to be eligible to receive the dividend), and then selling those shares on or after the ex-date. In the past, there were certain tax advantages to using this strategy, but those perks no longer exist.
Important fact regarding dividend distribution
Dividends are not free money. On the ex-date, share value will drop by approximately the dividend amount. Of course, there are many other factors that will influence share price on the ex-date but one of them is a deduction of the future dividend amount.
Proposed strategy
- Wait for a corporate earnings report to pass
- Sell an out-of-the-money (OTM) cash-secured put that expires prior to the ex-date and before the next earnings release
- Capture option premium
- If the put option is exercised, hold the shares through the ex-date to also capture dividend premium
Real-life example with WMT
- WMT had an earnings release on 2/17/2022
- The next projected earnings report was on 5/19/2022
- WMT next ex-dividend date was on 5/5/2022
- Check the put option-chain to generate a cash premium that will match the annualized dividend amount
- On 4/29/2022, WMT was trading at $153.16
WMT Earnings Release Date (www.earningswhispers.com)
WMT Dividend Information (www.dividendinvestor.com)
The annual dividend premium is $2.24 per-share and that will represent our target premium for the OTM put sale. This represents a 1.45% annual yield.
WMT put option-chain on 4/29/2022
The option-chain shows a bid price of $2.28 for the $152.50 slightly OTM strike. This aligns with our target of $2.24 per-share.
WMT put entries into the Trade Management Calculator
WMT initial calculations and trade structuring
The unexercised return is 1.52% which aligns with the 1.45% annualized dividend yield. If the put is exercised, the purchase discount is 1.92% along with the capture of the quarterly dividend amount. The screenshot also shows exit strategy threshold price points. The strategy risk is when share price declines below the breakeven price point of $150.22.
Discussion
I have never been a huge proponent of focusing in on stock dividends. I view them as icing on the cake rather than a primary focus of our investments. However, there is nothing wrong with this approach and many of our members do enjoy the benefit of focusing in on dividend income as well. This article proposes a strategy where both option-selling and dividend income can be combined into a low-risk approach to dividend capture with opportunities to generate much more than dividend premiums. In this WMT real-life example, annualized dividend income can be attained with only 1 option sale and 3 additional opportunities possible.
Author: Alan Elmann