Why Risk Selling Eaton?

I don’t sell a long-term position unless there are some compelling reasons to do so. In the case of Eaton (ETN), my capital gain thus far is over 118%. The first 200 shares were purchased in 2012 and are now worth 275.90% more than I paid for them. I have received well over $5,000 in dividends during the last five years alone. Sometimes, however, the expected compensation of continuing to own an investment is not as attractive as the potential to get some covered call income and to lock in some of the gains.

Modified Covered Call Approach

My normal strategy is to sell just a portion of an equity position as a covered call, repeating the process each week until the shares are called away at a profit. For example, if I own 300 shares of a position, this generally means I sell a contract for 100 of my shares. However, I hold 500 shares of ETN, so I decided to save some time and enter three separate options orders. Because options expire on Fridays, I sold a covered call for each of the next three Fridays: March 19, March 26, and April 1. In each case the expiration price was increased by a dollar: $139, $140, and $141.

Income Received for Three Covered Calls

Three income possiblities. Two of them are certain.

Because two of the three contracts were for 200 shares, I received more income on those sales. The total income for the Eaton covered calls (after transaction costs for each trade) was $746.52. To put this in perspective, this is the same as two full dividend payments.

It gets even better. Because my shares cannot be called away until March 19, at the earliest, I will also receive the dividend of $380 on my 500 shares on March 30. This is because the Ex-Dividend date is March 16. So rather than just selling my shares at the current market price of $139.55, I get the covered call income, plus the dividend. Of course, if the share price is greater than $139 on Friday, I am required to surrender my shares in the first contract to the buyer of the covered call. But remember that I wanted to sell them anyway.

Why Patience Pays

On March 19, 2020, during the Covid-19 crisis, ETN shares dropped to $72.45. Had I sold them at that time, I would have missed seeing this remarkable recovery, the dividends that have been paid since then, and this income from the covered calls. An investment strategy keeps me from jumping ship at the wrong time. This is especially helpful when an investment is paying an uninterrupted dividend.

Here are the screen prints from Fidelity’s Active Trader Pro, where I enter my covered call trades.

One contract was for 100 shares and expires April 01. The other is for 200 shares and expires a week from Friday.
The contract that expires March 19 is for 300 shares. These shares could be called away for $139 per share.