A Guide to Conservative Income Producing Option Strategies for Dividend Stocks

Two other things to note with options and taxes. If you are assigned shares by a written put, the option premium does indeed reduce your cost basis when it comes time to calculate taxable capital gain. And when considering writing covered calls don’t forget that having shares called away will induce a taxable event, assuming the effective sell price is above your cost basis.

One other point to keep in mind. Because of the factors that determine premium size, options are best written on high volatility stocks, preferably highly liquid blue chips. This is because utilities such as Southern Company (SO), or AT&T (T) have very low betas, meaning very low volatility. So their option premiums are generally too low to make it worth pursuing the strategies described in this article.

And since options markets are less liquid than the stock market, trying to write options for small, less well-known companies can mean running into problems having your limit order filled. And even if the order for a smaller stock is filled, the difference in the bid/ask price can result in a lower premium, one that’s not worth making the trade given the risks inherent with these financial tools.

Closing Thoughts on Put and Call Writing for Dividend Stocks

Please don’t misunderstand me. Options are merely one tool to help long-term dividend investors meet their financial goals. No one needs to use options to be successful, as a buy, hold, add on dips, and reinvest the dividends approach is more than enough to build exponential income and wealth over time (learn seven habits of highly effective dividend investors here).

That being said, if you understand the details and risks entailed by options, they can be a powerful tool. And when used in concert with high-quality dividend growth stocks, options can help you accumulate shares cheaper, as well as generate income in a sideways or slowly changing market.

So if you have the interest, time, and sufficient capital to manage the risks involved with these powerful financials tools, conservative, income generating option strategies may be something to consider using to increase the long-term returns and income generation of your diversified, long-term dividend portfolio.

Disclosure: None

Additional Links:

(1) http://www.simplysafedividends.com/blue-chip-dividend-stocks/

(2) http://www.simplysafedividends.com/will-rising-interest-rates-hurt-dividend-stocks/