Atmos Energy has an annualized dividend yield of around 2.3% and boasts a 38-year streak of increased dividend payouts. Investors desiring to generate even further income could look at a covered call trade in Atmos Energy stock.
A covered call strategy is one way to slightly reduce the risk on a long stock position while also generating some premium. The catch is that upside is limited above the covered call strike. So, let's look at how a covered call trade on Atmos stock might take shape.
Buying 100 shares of ATO stock would cost around $13,780, based on recent trading. Meanwhile, a Nov. 15-expiring 140-strike call option is trading around $2.65, generating $265 in premium per contract.
Atmos Energy Stock Today: The Covered Call
Selling the call option generates an income of almost 2% in just under two months, equaling around 15.2% annualized.
If ATO closes above 140 on the expiration date, the shares will be called away at 140. This leaves the trader with a total profit of $487 (gain on the shares plus the $265 option premium received).
This strategy equates to a 3.6% return, or 28% on an annualized basis.
Here's The Rub
Of course, the risk with the trade is that Atmos Energy stock might drop, which could wipe out any gains made from selling the call.
Covered calls can be an effective strategy for generating income, managing downside risk, and reducing the effective purchase price of a stock.
Atmos Energy, with a $21.5 billion market value, is one of the largest natural gas-only distributors in the United States. It distributes natural gas to residential, commercial, industrial, and public authority customers. According to IBD Stock Checkup, ATO stock ranks No. 2 in its group overall. It has a Composite Rating of 84, an EPS Rating of 90 and a Relative Strength Rating of 83.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
