8 – How to Get Paid Twice on a Stock!

OK. You are looking at my title, and you ask yourself, “Wait, how do I get a stock to pay me twice? What the heck does that even mean?” 🫤 I told you previously that I would give you specific examples of how investors make money on what is called Covered Calls or writing a Call.

So today, I am going to show, not only how to do this, but how on certain stocks you can wind up getting paid twice. Does this sound like magic? Well, it is not but it sure is a boon to investors who learn what to do. So, continue reading!

And let me state as I usually do. I am not trying to teach you how to trade options like a day trader would do. That is too risky for most people, especially seniors who are not used to option trading and those of us who are just looking to raise income. What I am teaching today is not day trading in any sense.  And I’m not making any recommendations. I’m simply talking about how this strategy works for educational purposes.

I will say however that there are many successful day traders making a nice living. But that kind of trading is a bit hectic, so we will leave that to the younger generation.

OK, let’s get into it.

I’ll use Verizon (VZ) as my first example because they have good Call options to work with. Let’s say you bought VZ on Monday July 6^th of this year. The stock closed at $42.07, so we’ll use that price as a buy point. Once you own the stock you look at a Call option to sell. Remember I told you that you can sell a Call against stocks that you own and raise money doing so.

This is called a Covered Call as mentioned above. A Covered Call gets its name because the Call option you sell is “covered” by stock you already own.

For example, if you own 100 shares of VZ and sell one Call option contract against those shares, your obligation to sell the shares at the Call’s strike price and on or before the expiration date is covered by the 100 shares sitting in your account.

Remember, the strike is the price you agree to let the buyer of your Call exercise their right to buy your shares of VZ. The expiration date is the last date the buyer of your Call can exercise their right. And remember, options always come in contracts of 100 shares. So, to sell a Covered Call you must own at least 100 shares.

To ease your mind, let me remind you that who buys your Calls and how the mechanics of how all this is handled, is performed by your brokerage. All you have to do is decide what options you want to enter.

Keep reading. I’m still going to show you how you can get paid twice from owning VZ.😊

When you sell a Call contract it is referred to as selling to open. When you sell a Call contract to open, three things can happen to close it out and end the contract. (Let’s assume you sold a Call contract with a $45 strike for VZ.)

1. If VZ is above the $45 strike at expiration, your shares will most likely be called away. They can also be called away before expiration, although that is far less common. In this case, you keep the money you raised from selling the Call options. However, you lose your stock to the buyer. But you sold it to that buyer higher than you bought so you have a profit. Remember, I stated above that we bought the stock at $42.07. (Sold at the strike for $45 – bought at $42.07 = $2.93 profit)

• VZ never goes up to your agreed upon strike price, so you keep the stock and you keep the money (premium) you raised for selling the stock

• There is a third choice which would be that you decide to close the Call Option out early by buying it back to close for whatever price it is going for at the time. You might do that because you decide the price of the stock is getting too close to the Call’s strike price and you do not want to sell. I’m not going to elaborate on that at this point because it is not the aim of this lesson.

With the above in mind, let’s take a real look at what you might have done in this scenario. On July 6^th you bought VZ for $42.07. Assuming you bought 100 shares, let’s say on July 10^th you decided to sell a Call option contract against your stock to raise some money. You go to the tools in your brokerage and look for what Call options are available. You decide an expiration date of August 21^st, 2026, would be good.

You see that the 45 strike, three dollars higher than your buy price, would be good and see that you can sell it for $0.64 a share, which would give you $64 per contract. The premium is credited to your account when the trade is executed. You simply click on the option, select sell to open at market price, and hit enter and the money is yours. Take a look at the actual option chain from that time below.

On the left of the image are the Calls and on the right are the Puts. Today we are concentrating only on the Calls. Notice the column on top that says Strike in the gray middle right. Then see the blue line and it is on the 45 strike. Now notice the first column that says last on the left. That is the price I picked ($0.64). The option is trading between $0.59 and $0.68. You can see that on the Bid/Ask columns at the top. So, I figured that last price was a price I could sell it for although in actuality,  the price you receive can vary by a few pennies.

So now you have raised $64 and that is getting paid twice from VZ. Why? Because on August 3^rd you received a dividend from VZ of $0.70 or $70.00 for 100 shares.

On 100 shares, you would have received a combined total of $134. ($70.00+$64.00= $134.00) On 500 shares that would be $670.

Getting the idea now?  It’s not magic as I said above, but it is a real boon to your cash flow. 😊

Now you might ask what the downside is. And there is a downside if you can call it that. That downside is if VZ moves above $45, it is most likely going to be Called away by the owner of the Call – the person who bought the Call that you sold. And in this case, on the August 21^st expiration date, VZ was going for around $49 so it would have most likely been sold.

So, you lost that stock, but what did you gain? You bought the stock for $42.07. You received a dividend of $0.70, (assuming you keep the stock through ex-dividend date) you received an option premium of $0.64, and you made a profit of $2.93. So, all together you profited $4.27 or $427 on 100 shares. On 500 shares that would be $2,135.

(Sell VZ for $45.00 – bought at $42.07 = $2.93 + a dividend of $0.70 + Call premium of $0.64 = $4.27)

Hey wait! That’s actually like getting paid 3 times. 😮 Not bad!

So, what happens if the stock doesn’t reach the $45 strike price and only goes up to $44.75 say. In that case you keep the stock, you keep the dividend and you keep the money you raised from selling the Call. Then you can do it all over again with another Call of another Expiration Date..

This type of strategy sure makes me excited, and I hope it makes you excited too!

Now, let’s look at one more example.

On July 15^th I introduced you to Realty Income Corp. (O) On that date the stock was trading for $63.26. Assuming you bought 100 shares, let’s say on July 24^th you decided to sell a Call option contract against your stock to raise some money. You go to the tools in your brokerage and look for what Call options are available. These only have monthly options instead of every week like VZ.  August 21^st expiration is not showing very much premium, so you go to the September 18^th expiration.

The stock is now trading higher at about $65.60, so you are ahead at about $2.34 already. You see that the 67.50 strike, $4.24 higher than your buy price, would be good and see that you can sell it for at least $0.65 a share which would give you $65 per contract. Again, you simply click on the option, select sell to open at market, and hit enter and the money is yours. The money goes into your account today. Look at the actual option chain below.

Just follow the same logic as above in VZ.

OK so what happened in this scenario. Well, the stock has gone down and is currently under the $67.50 strike, so it is very unlikely to be Called out at this point. But the Covered Call is still active until September 18^th, so we’ll just have to wait and see what happens.

However, what have you already accomplished? On July 15^th it paid a dividend of $0.27 and since it is monthly, you made $0.27 again on August 14^th. So, you’ve made $0.54 in dividends and $0.65 in Call premium for a total of $1.19.

I think you got the idea now that this is a pretty good strategy. But if you have questions, please let me know. Next time we’ll look at two new dividend stocks.

If you enjoyed this article, please click the Like button below and, if you haven’t already, Subscribe to the blog at the bottom of the page. It’s completely free, and you’ll receive an email whenever a new article is published.

I’d also love to hear your questions, suggestions, or comments. And of course, I’d love to hear about the stocks or ETFs you have been successful with! You can leave them at the bottom of this page in “Comments” or email me at ponzot2004@yahoo.com.

Until next time,

Tony