Recently the Washington Nationals came within a seam-popping stretch of completing a triple play against the Los Angeles Dodgers. Such a feat is rare in baseball, but these days it can be quite common in the trading world. Just in case you haven’t heard of such a thing before, I’ll be more specific. I’m talking about using stocks and options to create a way in which you make money three ways on the same stock: expecting capital appreciation, receiving dividends, and selling covered calls.
To make this trade you need a stock with three characteristics, the first is an upward trend. If the stock is in a bullish move, you may be able to anticipate at least some capital appreciation while it lasts. You would think that such stocks might be hard to find in a bearish climate, but is that the case?
The second characteristic is reasonable dividends. As it happens there are many of stocks paying such dividends, and they are quietly becoming fashionable to investors in these bearish, volatile market conditions. Given that investors are seeking safe havens of any kind, it isn’t much of a surprise that the Dividend Index Fund ETF (ticker symbol DVY) is outperforming the market since the August 9th lows (see chart below).
What may be more of a surprise is just how readily available the possibilities are for the triple play trade. The final characteristic is a stock that has options suitable for trading. These can usually be found on stocks that trade an average of over 1 million shares per day. If you use your favorite search filter for stocks and search for a stock that pays better than a 4% annual dividend, trades more than a million shares a day, and is up more than 10% over the last month, you will find an eye-popping list of nearly 40 stocks!
You make the trade by simply buying the stock and holding on for at least 3 months to collect a quarterly dividend, and while you are holding the stock, you sell out-of-the-money covered calls. Such a strategy can easily earn you 20 percent or more under the right conditions. What conditions? The kind of market conditions that give most investors severe headaches: volatile markets that threaten bearish moves followed by upward retracements that tease towards bullish trends.
The conditions that exist right now imply that options prices are high but likely to fall (if the market continues its sideways trend or breaks out to a bullish move). Meanwhile dividend stocks are outperforming the market at large. That makes for a plentiful number of triple-play opportunities out there. Speaking of headaches it may be worth noting which of the stocks on the list of 40 has the best trading volume and option pricing. It is none other than…surprise…aspirin-maker Bristol-Meyers Squibb (BMY).