Explanation of my AT&T Paper Trade
I posted a paper trade with AT&T (T) yesterday. I wasn’t in position to make the trade but I felt it would be a good learning opportunity.
T is a high dividend stock. It pays 52¢ quarterly. This is $2.08 per share annually. With my paper trade I bought the shares at $26.20. To determine your annual percentage of the dividend you divided the annual dividend by the price you paid for the stock. 2.08 divided by 26.20 is 7.9%. If you are into collecting dividends AT&T is a great stock.
Let’s remember this is a paper trade! I did not make this trade. This is for learning purposes. The reason I’m saying this is because in order to make this trade work it would have had to be made on 1/6/22. The ex-day was 1/7/22. The ex-dividend date or “ex-date” is the day the stock starts trading without the value of its next dividend payment. That quarterly dividend will go to the seller of the stock. You must own the stock before the ex-day, which would be before the 7th. The pay-date is the day you will receive the dividend into your account. The next pay-day for AT&T is 2/1/22.
There are many trading strategies. Many traders trade to capture the dividend. Capturing dividends is a smart, “slow and steady, steady and slow” strategy to bring in money.
With my paper trade I bought the stock on 1/6/22, which is before the ex-day of 1/7/22. For learning purposes I will be receiving the dividend of 52¢ per share.
In addition to buying the stock for the dividend I also sold a Covered Call to bring in a premium. On 1/6/22 I bought 1000 shares of AT&T at $26.20. I also sold 10 contracts of the 2/11/22 $27 Calls for a premium of 50¢. This gave me $500. I picked the Expiration Date of 2/11/22 because I wanted to make sure I hold the stock past the pay-day of 2/1/22. I could have sold the Expiration Date of 2/4/22 but I wanted a little higher premium. You can pick any Expiration Date past the dividend pay-day of 2/1/22.
1/6/22 Buy 1000 Shares T @ 26.20
1/6/22 – Sell to Open 10 T 2/11/22 $27.00 C @ 50¢ (+$500)
Most dividend stocks are not big movers. This is why the premiums are a little low. This premium is 1.9% for the 5 week trade, which would be in the area of 20% annually. I like to get a bit higher premium but if you add the dividend of 7.9% this can be a nice strategy for many traders.
Let’s see how this can work out. If AT&T is above $27 by 2/11/22 you will get assigned. In this case you get the 52¢ dividend. You keep the 50¢ premium. And you make 80¢ on the stock sale. This is a total of $1.82 per share. On the 1000 shares it’s $1820 which is a 6.9% gain for the 5 week trade. This would be a great gain for a very safe trade. If the stock does not get to $27 by 2/11/22 you don’t get assigned and you will continue owning the stock. At this point you can sell another Call with the Expiration Date past the next dividend pay-day.
Almost every assigned Covered Call gets assigned on the Expiration Date, however, you can get assigned before the Expiration Date. They would not exercise their right to assign early for the dividend because they would be in the position after the ex-day. It can happen but it happens so rarely I wouldn’t worry about it.
Another bad thing that can happen is the stock tanks down. If that happens you keep the premium and you keep the stock without assignment. Take a look at AT&T’s candlestick chart. I don’t see the stock going down much.
I feel this is a great strategy for investors who cannot be near their computer all day as a trader. There are a lot of great dividend stocks to use this strategy on. You might see me doing this sometime soon.
Remember, you can take your dividend in cash of in shares. If I’m gonna stay in a stock I like to take the dividend in shares.
If you have any questions on the strategy send me an email.
Successful trading,
Steve
The Options Coach