Profiting from Volatility by Selling Call Options

Profiting from Volatility by Selling Call Options

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Looking for a way to boost the income from your dividend stocks? One way, according to Fortune, is to sell call options on the dividend paying stocks that you own.

This is how it works: selling a call option on a stock you own allows someone else (the call option buyer) to buy your stock at a higher price than today’s at a future date (which the buyer would only do if the stock rises above the set price, called the “strike price”). For selling the call option, you the seller get paid a premium that can be considered additional income.

If the stock does not rise above the strike price, you keep your stock and the premium. If the stock rises above the strike price, you sell your stock at the strike price, which cuts off upward profit potential, but you still keep your premium.

It’s a particularly good time for this investment strategy – the value of options (and therefore the premium you would receive for selling a call option) increases with stock volatility, and the VIX index has been highly elevated for the past couple of months.

"It's a strategy that can improve your odds of success and provide superior returns over time," Michael Khouw, director of equity derivatives trading at Cantor Fitzgerald, said to Fortune.

To help you explore this topic, we collected data on about 150 stocks that have seen a sharp increase in the number of call options relative to put options over the last two weeks.

To express this relationship, we'll use the put/call ratio (i.e. all the stocks have seen declining put/call ratios over the last two weeks).

In addition, all of the stocks mentioned below have proven themselves to be more profitable than their industry competitors.

There has been a significant increase in the call option open interest on these highly profitable names — do you think any of these stocks is worth a closer look?

Use this list as a starting point for your own analysis.

 

1. Bancolombia S.A. (CIB, Earnings, Analysts, Financials): Provides financial products and services to individual and corporate customers in Colombia, Panama, El Salvador, Puerto Rico, the Cayman Islands, Peru, Brazil, the United States, and Spain. Over the last two weeks, the stock's open interest Put/Call ratio changed from 3.08 to 0.36 (a change of -88.31%). TTM gross margin at 73.02% vs. industry average at 71.3%. TTM operating margin at 51.89% vs. industry average at 39.28%. TTM pretax margin at 26.89% vs. industry average at 22.65%.

 

2. QEP Resources, Inc. (QEP, Earnings, Analysts, Financials): Operates as an independent natural gas and oil exploration and production company. Over the last two weeks, the stock's open interest Put/Call ratio changed from 0.34 to 0.07 (a change of -79.41%). TTM gross margin at 58.39% vs. industry average at 32.28%. TTM operating margin at 22.63% vs. industry average at 12.44%. TTM pretax margin at 19.17% vs. industry average at 13.56%.

 

3. STR Holdings, Inc. (STRI, Earnings, Analysts, Financials): Engages in the manufacture and sale of encapsulants to the solar module industry. Over the last two weeks, the stock's open interest Put/Call ratio changed from 0.93 to 0.31 (a change of -66.67%). TTM gross margin at 43.01% vs. industry average at 37.9%. TTM operating margin at 20.96% vs. industry average at 17.44%. TTM pretax margin at 17.96% vs. industry average at 16.42%.

 

4. McCormick & Co. Inc. (MKC, Earnings, Analysts, Financials): Engages in the manufacture, marketing, and distribution of flavor products and other specialty food products to the food industry worldwide. Over the last two weeks, the stock's open interest Put/Call ratio changed from 0.21 to 0.08 (a change of -61.90%). TTM gross margin at 44.52% vs. industry average at 34.47%. TTM operating margin at 15.05% vs. industry average at 12.68%. TTM pretax margin at 14.42% vs. industry average at 10.13%.

 

5. NBT Bancorp, Inc. (NBTB, Earnings, Analysts, Financials): Provides commercial banking and financial services to individuals, corporations, and municipalities in central and upstate New York, northeastern Pennsylvania, and the greater Burlington, Vermont area. Over the last two weeks, the stock's open interest Put/Call ratio changed from 0.24 to 0.11 (a change of -54.17%). TTM gross margin at 78.85% vs. industry average at 71.3%. TTM operating margin at 39.58% vs. industry average at 39.28%. TTM pretax margin at 24.12% vs. industry average at 22.65%.

 

6. Tenaris SA (TS, Earnings, Analysts, Financials): Engages in the manufacture and sale of steel pipe products. Over the last two weeks, the stock's open interest Put/Call ratio changed from 0.57 to 0.33 (a change of -42.11%). TTM gross margin at 41.26% vs. industry average at 34.8%. TTM operating margin at 18.54% vs. industry average at 17.88%. TTM pretax margin at 19.76% vs. industry average at 16.48%.

 

7. Patterson Companies Inc. (PDCO, Earnings, Analysts, Financials): Operates as a distributor serving the dental, companion-pet veterinarian, and rehabilitation supply markets in North America. Over the last two weeks, the stock's open interest Put/Call ratio changed from 0.92 to 0.54 (a change of -41.30%). TTM gross margin at 34.16% vs. industry average at 21.24%. TTM operating margin at 10.81% vs. industry average at 8.54%. TTM pretax margin at 10.17% vs. industry average at 7.04%.

 

8. Fresenius Medical Care AG & Co. KGAA (FMS, Earnings, Analysts, Financials): Provides products and services for patients with chronic kidney diseases. Over the last two weeks, the stock's open interest Put/Call ratio changed from 0.04 to 0.03 (a change of -25.0%). TTM gross margin at 38.99% vs. industry average at 21.24%. TTM operating margin at 15.82% vs. industry average at 8.54%. TTM pretax margin at 13.62% vs. industry average at 7.04%.

 

9. Snap-on Inc. (SNA, Earnings, Analysts, Financials): Manufactures and markets tools, diagnostics, equipment, software, and service solutions for professional users in the United States, the United Kingdom, Canada, Germany, Japan, France, Australia, Spain, the Netherlands, Italy, China, and Sweden. Over the last two weeks, the stock's open interest Put/Call ratio changed from 0.88 to 0.67 (a change of -23.86%). TTM gross margin at 51.26% vs. industry average at 32.56%. TTM operating margin at 14.23% vs. industry average at 12.65%. TTM pretax margin at 12.61% vs. industry average at 11%.


(Written by Alexander Crawford, list compiled by Eben Esterhuizen, CFA. Put/call data sourced from Schaeffer’s, profitability data sourced from Fidelity, all other data sourced from Finviz.)

 

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