Frequently Asked Questions
1. What are stock options?
To have a complete understanding of stock options is beyond the scope of this site. If you are not familiar with equity options, you should not subscribe to this newsletter, nor should you consider its recommendations.
An excellent place to begin your education is by downloading the standard options clearing house informational brochure.
If you do develop a level of comfort with the concept of using options contracts to enhance your stock returns, please consider a subscription to the OTP Newsletter at that time.
2. What is a capture dividend strategy?
Occasionally, a decision to purchase a stock is based on timing the purchase to coincide with the ex-dividend date, that is the last date at which the purchaser is entitled to the dividend.
When the ex-dividend date arrives, the value of the underlying stock is typically reduced by the amount of the dividend. The underlying option, particularly when it is just a few days away from its expiration, will also be reduced in value, thereby offering a lower premium.
In the best of all worlds, the dividend capture strategey seeks to not only get a high options premium, but to also allow the buyer of the underlying stock to get the dividend, as well.
If your stock is “in the money”, that is, its value is greater than the strike price, you do stand a greater chance of the options holder exercising their right to purchase your shares at the strike price, specifically so that they can get the dividend.
3. Are there tax implications or benefits from this strategy?
As with all tax related questions, you should consult with your tax expert.
Please be aware that all recommendations, if followed, will be considered short term trades, thereby subjecting them to higher rates of taxation. Your stock trades, as well as options premiums are subject to capital gains.
However, in the case of dividend capture strategies, there is the advantage of shifting capital gains into dividends.
If your stock is not exercised, and you receive the dividend, the final value of your stock, when you liquidate the position will be less than it would have been, had there not been a dividend. Rather than having to pay a short term gain on that amount, it will be taxed at the lower rate for dividends.
4. Can I see evidence of your past results?
Yes and no.
You can see very detailed information at my Blog. There you can find detailed trading and performance information.
The caveat to that, however, is that the data is no longer being updated and represents 2012 Trades up to April 13, 2012.
A that point, Option to Profit, on a subscription basis took its place and reserved that information for subscribers only, although there are occasionally Free Preview periods for non-subscribers. Additionally, data is periodically updated on a mirror non-subscriber site.
The results of positions opened and closed in 2012 may be seen at Seeking Alpha.
Otherwise, beware of data. The internet is filled with individuals that fabricate results and offer “testimonials”.
My advice is that if you decide to subscribe, you follow the recommendation(s), entering all of the appropriate data, including transaction costs, into a spreadsheet, and assess the results for a month, or 2, before you commit your personal funds, or commit on a limited basis.
Although a significant number of people do stay with us beyond the 3 month period, willing to pay $200 per month for the recommendations, it is always my hope that individuals will have enhanced their education enough so that they may proceed on their own.
That hope isn’t always realized and for that reason subscribers may also elect a one year extended subscription.
5. What if I really like the stock that you recommended and want to hold onto it for another month or more?
As my father used to say, “It’s a free country”.
None of the recommendations you will see here are intended for long term holding or long term call options writing. My preference is for relatively rapid turnover of positions, where possible. However, some investors may benefit from the use of longer term options (LEAPS), particularly in high dividend yielding positions and where tax consequences may be of concern.
6. Do you have any control or access to my personal brokerage account?
No. Absolutely not. You are responsible for all of your own trades, profit and loss calculations, funding your account, tax payments and any and all other activities that may be related to your account.
I have enough trouble remembering how to access my own accounts.
7. Is this strategy compatible with a tax deferred retirement account?
Each individual must assess their own tolerance for risk, based on many factors, including years anticipated until retirement. The strategy that is recommended is not inherently risky in nature, however, as we have seen in the past 18 months, on any given day, there may be incredible volatility.
Certain positions may be better suited for tax deferred accounts, such as dividend capture strategy trades. Likewise, trades identified as being of higher risk may be better suited for taxable accounts.
8. When do I make my trades?
While we generally recommend executing trades first thing in the morning, in cases of high volatility at the open of the trading day, we recommend waiting for the initial market reaction to stabilize before executing recommended trades. As market tone for the day becomes more apparent, additional Trading Alerts may be sent. They are most frequent on Monday and Tuesday, with some pick-up in activity on Thursday and coming to a crescendo on Fridays.
Additionally, the equity trade must be made first. As with all trades, we strongly recommend “Limit” orders. That is, you must specify the price that you are willing to pay for shares.
Once the equity trade has been made, we strongly recommend the you very quickly enter your opening order to sell options on the underlying stock. Always for the current month, as we recommend.
For those whose brokerage allows the ability to execute trades as “Buy/Write” trades, that is the preferred means of execution.
For “rollover” trades if your brokerage allows execution of “spread trades” that is the preferable mode.
Since options trading may be thin, thereby making it more difficult to match willing buyers with willing sellers, we recommend seeking to sell your options at the current bid price, rather than the ask price. This is because you do not want to have equities without the insurance hedge provided by the options, in the event that the stock price declines. Holding out for a higher premium may endanger your ability to execute the options trade in a timely fashion.
For those able to place “Buy/Write” or “spread” trades, a simple “Net Debit” ir “Net Credit” amount is used rather than entering individual share and option contract prices. Those parameters are provided in Trading Alerts and on web site updates.
In the event your options are assigned, that is, the buyer of the call options decides to purchase them from you at the agreed upon price, you do not have to do anything further.
However, if the stock was not exercised, we then look for opportunities to accumulate additional premium until the shares do get assigned. However, some positions may warrant sale at a loss if it appears that the stock itself is irretrievably damaged
9. What kind of trades will I be making?
First, you have to execute “Buy” orders for the stocks that are recommended.
Once you have made those purchases, you must sell covered calls. This is also referred to as “Sell to Open”. Each options contract represents 100 shares of the underlying stock.
When you “Sell to Open”, you essentially are holding a “short position”. Your short position is covered in potentially one of 3 different ways.
Occasionally, a recommendation will be made to sell “Cash secured Puts”. In such cases the seller is obligated to purchase shares from the option contract buyer at a specified price and time frame. This is a more risky strategy as conceivably a stock’s price could fall to zero.
Do you have further questions? We will try to answer them for you either directly, or by posting your question and its answer in the FAQ section.