Boost Kimberly-Clark Yield with Covered Call Strategy
Wednesday, Nov 27, 2024 8:26 am ET
3min read Kimberly-Clark (KMB) is a top choice for income investors, boasting 58 consecutive years of dividend growth and an impressive 3.5% annualized yield. To enhance the yield on this defensive stock, consider implementing a covered call strategy. This approach involves selling call options against a long stock position, generating premium income while limiting upside potential.
A covered call strategy can significantly increase the yield on Kimberly-Clark shares. For instance, buying 100 shares of KMB at around $13,973 and selling a Dec. 20, 142-strike call option for $0.85 late Tuesday generates $85 in premium. This yields 0.61% in just under one month, annualized to an impressive 9.31% (Investors.com, 2024-11-27). If the stock closes above 142, shareholders would pocket a total profit of $312, or a 2.25% return on an annualized basis.
However, it is essential to understand the risks associated with this strategy. Early exercise of deep-in-the-money American-style calls prior to the ex-dividend date could capture the dividend payment but may forfeit the remaining time value of the option. Additionally, the stock price could drop, potentially wiping out gains made from selling the call. To mitigate these risks, consider selling out-of-the-money calls or buying protective put options.
The ex-dividend date can also impact the pricing dynamics of Kimberly-Clark call and put options. On the ex-dividend date, the stock price typically falls by the amount of the dividend, making call options less expensive and put options more valuable. This is due to the expected fall in the stock price, which impacts the pricing of options. To generate additional income and manage the risk of a stock price drop on the ex-dividend date, investors could employ a covered call strategy.
In conclusion, a covered call strategy can enhance the yield on Kimberly-Clark shares, providing income investors with a higher return on their investment. However, it is crucial to weigh the potential benefits against the risks and consider alternative strategies to mitigate those risks. By carefully evaluating the dividend payment schedule, stock performance, and market conditions, investors can optimize their returns through strategic option trading on dividend winners like Kimberly-Clark.
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A covered call strategy can significantly increase the yield on Kimberly-Clark shares. For instance, buying 100 shares of KMB at around $13,973 and selling a Dec. 20, 142-strike call option for $0.85 late Tuesday generates $85 in premium. This yields 0.61% in just under one month, annualized to an impressive 9.31% (Investors.com, 2024-11-27). If the stock closes above 142, shareholders would pocket a total profit of $312, or a 2.25% return on an annualized basis.
However, it is essential to understand the risks associated with this strategy. Early exercise of deep-in-the-money American-style calls prior to the ex-dividend date could capture the dividend payment but may forfeit the remaining time value of the option. Additionally, the stock price could drop, potentially wiping out gains made from selling the call. To mitigate these risks, consider selling out-of-the-money calls or buying protective put options.
The ex-dividend date can also impact the pricing dynamics of Kimberly-Clark call and put options. On the ex-dividend date, the stock price typically falls by the amount of the dividend, making call options less expensive and put options more valuable. This is due to the expected fall in the stock price, which impacts the pricing of options. To generate additional income and manage the risk of a stock price drop on the ex-dividend date, investors could employ a covered call strategy.
In conclusion, a covered call strategy can enhance the yield on Kimberly-Clark shares, providing income investors with a higher return on their investment. However, it is crucial to weigh the potential benefits against the risks and consider alternative strategies to mitigate those risks. By carefully evaluating the dividend payment schedule, stock performance, and market conditions, investors can optimize their returns through strategic option trading on dividend winners like Kimberly-Clark.
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