Steel Dynamics has been a strong performer in recent months, rising as much as 112% from its early July low. Along with strong stock performance, STLD stock pays a 1.1% annual dividend, based on its quarterly cash payout of 34 cents a share.
So, as an options trader, how could you boost that overall yield? Consider combining a long holding in STLD stock with a covered call option strategy.
When selling a covered call, the investor receives a premium and must sell the shares at the strike price if called upon to do so.
One call option contract represents 100 shares, so investors can sell multiple call options if they have a particularly large stock holding.
Over time, covered calls can increase returns while also decreasing the volatility of a portfolio.
STLD Stock Today: Select This Covered Call Option
On STLD stock, a May 135-strike call option traded recently around $5.85. This generates $585 in premium per contract and increases the overall return significantly.
Steel Dynamics is on pace to pay $1.36 in dividends per share over a 12-month period. So, being able to generate a further $5.85 per share over three months is quite attractive.
The $5.85 in premium received also gives a small buffer on the downside of nearly 5%. That means STLD stock could trade 5% lower between now and May 19, and the covered call trade would still break even.
The break-even price can be calculated by taking the stock purchase price and subtracting the option premium received. The total capital at risk in the trade stands at roughly $12,000, and if STLD went to zero, that's how much the trade would lose.
Covered calls are a fantastic way to generate income from a stock holding while also providing some downside protection. Investors still would need to weigh the pros and cons of the stock before initiating a bullish trade like a covered call. The options market is anticipating STLD could move around 15% between now and May 19.
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IBD Ratings: Quite Strong As Steel
According to the IBD Stock Checkup, STLD stock ranks No. 2 in its group and has a Composite Rating of 95, an EPS Rating of 81 and a Relative Strength Rating of 97.
Please remember that options are risky, and investors can lose 100% of their investment.
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 Twitter at @OptiontradinIQ
