Amazon stock split pays me dividends (NASDAQ:AMZN)
Generate liquidity during bear markets
All major indices have moved into bearish territory this year. In fact, we are well into the tenth month of declines, as shown below.
In in a way, that’s good news. The average S&P 500 bear market lasts 289, or about 9.5 months, according to Forbes. The market will likely bottom long before the economy as it is looking to the future. When will this happen? I don’t know, and I’m not trying to time the market.
Aside from a few standouts, such as top pick AbbVie (ABBV), which you can find out more about heremany stocks have fallen significantly this year.
But there are still ways to make money while you wait for the tide to turn.
First, strong companies now offer higher than normal dividend yields. I’m not talking about dangerous leveraged funds offering 9-10%; it’s not my bag. There’s a big difference between strong companies with safe and rising payouts and returns that seem too good to be true (they probably are). These are highly publicized, so pay attention.
Many great companies that should weather a recession very well have historically strong returns. Two favorites are Texas Instruments (TXN) and JPMorgan Chase (JPM), as shown below.
Texas Instruments has increased the dividend every year since 2004, even during the Great Recession, at a compound annual growth rate (CAGR) of 25%. JP Morgan has raised the dividend for eight years and sees buybacks resume next year.
Now, without further ado…let’s get creative.
Covered call options
Another way to generate cash is to write covered call options. Bear markets are great times to generate liquidity this way for several reasons, including:
- Downward price trend
- Opportunity to reinvest at a reduced price for long-term returns.
I won’t go into all the details of covered call options, but there are some great resources available for beginners, including the link above from Investopedia and the one from Fidelity.
A covered call is the least risky option play. If you sell a covered call out-of-the-money, the worst that can happen is that you miss out on additional gains.
Volatility is useful for this strategy because it allows us to sell a covered call when the stock is rising sharply and buy it back cheaper when the stock is falling.
The general downtrend reduces the risk of the price suddenly rising well above the strike price. Especially if we sell a lot out of silver.
Doing this in a bear market allows long-term investors to reinvest the premiums in selling stocks.
2022 was the perfect time to sell covered calls. And Amazon (NASDAQ: AMZN) was an ideal stock.
Who says stock splits don’t matter?
Many would argue that stock splits don’t matter. After all, they don’t change the underlying value of the stock. But they open up opportunities that average investors wouldn’t typically have.
Amazon shares were trading at around $2,500 per share before its 20:1 split in early June 2022. This means an investor would need $250,000 worth of Amazon shares to sell an option, because options are sold in lots of 100. The split suddenly opened up the options market for many average investors.
Amazon has features that make it an attractive candidate for selling covered calls. Its popularity is a huge draw. There is a ton of volume for Amazon stock options, which is very important. It also means that the stock experiences the ups and downs needed to make a profit. There are many ups and downs since the stock split, as shown below.
My favorite strategy
There are several ways to execute an options strategy. I prefer a conservative strategy because Amazon is a stock I would like to hold as a long-term investment.
The conservative strategy means:
- Sell options well out of the money, even if it means pocketing a smaller premium.
- Keep the option expiration date 30-60 days. It also means a smaller premium, but much less risk.
- Not having open option positions straddling earnings releases when the stock could potentially rise significantly higher.
Here are two examples
Amazon’s stock price plummeted after the stock split, dropping nearly 18% in just over a week. It then rebounded over 5% on June 15, as shown below.
Business example #1:
I took advantage of this opportunity to sell July 29 calls at $135 for $0.74. The $74 premium isn’t huge, but the odds of the stock being called were very low. The stock should gain more than 25% in a month and a half to reach the strike price. Unlikely in a bear market.
The stock made an impressive push on a comeback, but I was able to close the covered buy position for $0.17 when the stock cratered on July 26 as shown below.
The net profit on each call option was $57 for an annualized return of over 4%. Low risk, low reward.
Business example #2:
The market made a valiant effort to come back from the June and July lows, but the comeback ultimately failed in late August. With the writing on the wall, I sold calls on October 21 at $147.50 and $147.00 for $1.05 and $1.15, respectively. The chart leading up to the trade is shown below.
I bought back each option two weeks later, on September 22, for $0.15 and $0.16 as the stock slumped. I could have held the options until they expired, but I like to lock in the gains when they are above 80%.
The trade spoils were $90 and $99 for a total return of $189. The annualized return is impressive due to the short duration, but this is another low-risk, low-return way to generate yield from a growth stock.
With results expected on October 27, I’m taking a wait-and-see approach. A strong earnings report could mean a sudden rise in the stock price because so much negativity is already priced in.
Understand the risks
Covered call options are low risk, but they are not risk free. The risk is that the stock rises significantly above the strike price and we miss out on juicy gains. If the price is higher than the strike price on the exercise date, we will have to abandon our shares or repurchase the call at a loss. We can mitigate risk by taking lower premiums for options that are more out of the money.
This is a difficult time for many investors. But it also offers significant opportunities. It’s much easier for long-term investors to find fantastic deals when the market is down. Higher dividend yields are easier to come by and now is a great time to reevaluate positions.
Executing a conservative covered call strategy can also generate income. Writing covered call options is a low-risk way to generate yield from growth stocks and earn small returns in a persistent bear market. As stated above, Amazon is a great stock for this approach.