Q: Hi 5i Team,
I'm wondering if you have any suggestions for using options to generate routine income. So far, I mainly write puts on companies that are temporarily out of favour but that I wouldn't mind holding for a while and also collect a dividend if I end up having to hold for a bit (e.g, ENB, TD, BN, CVS). I do this randomly (e.g., once or twice a year on a couple of companies) but would like to increase the frequency. I don't have a good sense for what expiry date I should choose (I typically go out six months or more) or the best strike price (I usually pick around the current price). Do you have any good ideas for the current market that you could suggest and could you recommend a resource to do more research. I'm currently thinking of writing puts on TD, CVS, and BTI and wondering if I should scatter their expiry dates.
Thanks as always,
Lisa
I'm wondering if you have any suggestions for using options to generate routine income. So far, I mainly write puts on companies that are temporarily out of favour but that I wouldn't mind holding for a while and also collect a dividend if I end up having to hold for a bit (e.g, ENB, TD, BN, CVS). I do this randomly (e.g., once or twice a year on a couple of companies) but would like to increase the frequency. I don't have a good sense for what expiry date I should choose (I typically go out six months or more) or the best strike price (I usually pick around the current price). Do you have any good ideas for the current market that you could suggest and could you recommend a resource to do more research. I'm currently thinking of writing puts on TD, CVS, and BTI and wondering if I should scatter their expiry dates.
Thanks as always,
Lisa
5i Research Answer:
One can always write covered calls as well as puts, which of course guarantees one will expire. Much depends, but we prefer one-month options at just above (or below for puts) current prices. The reason is that many estimates mis-judge short term volatility. In a 'normal' year (not the past three!) stocks do not really move that much, on average, in a month. Some out of favour others: BAM, NVEI (no dividend), NTR, MG, SLF, MX. We would also be fine with the three others noted. There are lots of online resources to go to, but most are trying to sell something. This is a decent primer.