iShares Dow Jones Select Dividend Index (DVY) wasn’t one I was actually planning on for my own account, but when I was considering it for one of my clients I decided it could fit nicely in my own portfolio too. It’s currently yielding 3.67%, not quite double that of SPY although its beta is 0.94.
While DVY was trading at $46.80 I sold two DVY November 46 naked puts at $0.95 and received $188.57 after commissions. I actually considered going slightly in the money with this naked put, but decided to keep my risk of assignment a little lower. I also considered selling a covered call, but the next ex-div date isn’t until December, so by then I’ll either be able to start over or will own the shares and can set myself up for the dividend by selling an out of the money covered call.
The premiums are nothing to brag about, but I when you add in the dividend if assigned it gets to be a decent return for the risk I’m accepting. When only looking at the premium I received, I have a 3.7% cushion before I even get to break even on this trade. If I am assigned and do end up going on margin for this position the dividend alone will more than pay for the margin interest I’m paying and at the same time I’ll be writing covered calls and taking in premiums every other month. I’m not in fear of another 20% decline in the market in the near term, so this is a risk I’m willing to take for now. I’m still eyeing MDY to get some more mid-cap exposure, but went for DVY first and didn’t want to go for both in the same day since I’m already getting ahead of myself a little.
Unrelated – I’m 12 subscribers short of 400 if anyone has been thinking about signing up, you can visit either of these links for the Full RSS feed or my email updates, both are free.
I think the trade is ok, but I would be concerned the open interest is really low for the Nov 18 puts (18 as of this post). Perhaps the 45? Having said that, I think with the market near its top, the only true money flows will be into dividend stocks, so this is a good proxy to have.
John, I’m not as concerned about the open interest because I don’t mind being assigned these shares. The 45 strike didn’t have high enough premiums to me to make the trade with the risk. It’s funny, of those 18 contracts open, I sold five of them including the few for my clients.