How to Boost The Yield on This Top Dividend Stock | IBD

TL;DR

A covered call strategy on Johnson & Johnson stock can enhance the dividend yield and provide a predetermined exit price.

Transcript

foreign hey Traders for today's trade we're looking at a covered call strategy on Dow Jones stock Johnson and Johnson so looking at J J on Market Smith the stock has been a significant underperformer of the past few months unlike the rest of the market in 2023 shares have been in a strong downtrend clocking in eight straight down weeks Shares are t... Read More

Key Insights

• ❓ Johnson & Johnson stock has been underperforming in the market, with a downtrend in recent weeks.
• 📔 The stock's dividend yield is a positive aspect, offering an opportunity to enhance the yield through a covered call strategy.
• 📔 A covered call strategy involves selling call options against the stock to collect income and define an exit price.
• 🧘 By selling a call option, investors can lower the cost basis of their long position and increase the annualized yield.
• 💦 The risk with this strategy is that the stock may continue to drop, potentially erasing any gains made.
• 🌸 Beginners should practice with virtual accounts before trading options and consider the complexity and potential loss of investment.
• 👏 Investors can use the Options Trader app from IBD for options education and trade ideas.

Questions & Answers

Q: What is a covered call strategy?

A covered call strategy involves selling call options against a stock to collect income and define an exit price. It allows investors to lower the cost basis of their long position and generate additional income.

Q: What is the risk with a covered call strategy?

The risk with a covered call strategy is that if the stock continues to drop, it may wipe out any gains made from selling the call. Investors should consider the stock's recent weakness before implementing this strategy.

Q: How does selling a call option generate income?

As the seller of a call option, you receive a premium from the buyer. If the stock price remains below the strike price at expiration, the buyer would not exercise the option, allowing the contract to expire and resulting in income for the seller.

Q: Should beginners practice with virtual accounts before trading options?

Yes, beginners should practice with virtual accounts before risking real money in options trading. Options are complex and can result in the loss of 100% or more of the investment in some cases.

Summary & Key Takeaways

• Johnson & Johnson stock has been underperforming in the market, but it offers a strong dividend yield.

• A covered call strategy involves selling call options against the stock to collect income and define an exit price.

• By selling a call option on Johnson & Johnson stock, investors can generate additional income and increase the annualized yield.