AMGN Initiates Monthly Dividend? Not Quite: Construct An AMGN Dividend Using This Idea! (Nasdaq: AMGN)

AMGN: Benzinga Strategy Session #5 of 100
When looking at the chart of Amgen, Inc. (Nasdaq: AMGN), I see a whole lot of opportunity to make consistent money with options. That being said, let's analyze the chart together before we get into any strategy. It's good to see what the picture of supply and demand looks like before we talk about risking capital.

Technical Analysis
When you pull up the chart I have attached to this article, you will note that I like a short term break up over the 200 and 50 day moving averages. The commodity channel index (CCI) is a pretty accurate way to gage short term movement in the underlying security, so I am going to put the edge in favor of the bulls. With a beta on AMGN shares of only 0.49, you should not be expecting too much movement in the stock. However, what you can expect is that the shares will likely modestly appreciate over time. Without a dividend, it is hard for one to want to invest in a slow moving stock.

Monthly Dividend Creation
Well, I propose you earn a dividend by writing call options against the stock that are out of the money. This works similar in nature to a dividend. Dividends help offset risk by lowering our cost per share; writing covered calls does the same thing. The tax benefits of a dividend are better than that of writing a covered call, so we must keep that in mind as well. However, the ability to write call options against our shares to generate increased cash flow is better as we can make more money from this than from dividends alone.

What we want to do is sell the $57.50 strike call option against each 100 shares we own. This allows us to make an appreciation on our shares by the difference of $57.50 and the cost basis of $56.61, or 89 cents. We also get to keep the price we sell the call options for (also called the premium) no matter what happens. Friday this premium was the mid point of the bid and ask on the call option. With a bid of $1.29 per share, and an ask of $1.35 per share, the premium is $1.32 per share. So, we add this premium to the possible appreciation of $0.89, to get a maximum return of $2.21 per share, or 3.9%.

A 3.9% Return Sounds Boring? Let's Annualize It!
Well this trade will take place over a 46 day period. If we divide that by 46, then multiply it by 365, we get a 31.0% return annually. Now that is not boring. Also, keep in mind that there is more benefits to this.

No only do we collect a "fake" dividend from AMGN, when Amgen, Inc. does not pay a dividend, but we also are reducing our break even point. By using options we are reducing our risk! Our break even point will now be our purchase price of $56.61, less the premium of $1.32, or $55.29 per share.

So if the stock closes in 46 days at $55, we are down only 29c per share. We had a chance to make an annualized return of 31%. Instead, we lost a little money in 46 days. Well, then we could write another call option against our position. Let's say we can write another one, less to be more conservative. Even if we only $1.00 for it, we could still have the chance to appreciate back up to $57.50 again. So our break even is lower by an additional $1.00. We still keep the original $1.32 per share, we keep this new $1.00 per share, which means we've made $2.32 in dividends already.

This is how investing has evolved. Just because your stock isn't paying a fat dividend does not mean you cannot be collecting a positive cash flow. So in summary, look for AMGN to rise slightly over the next 46 days, and write options against your position to create a "fake" dividend. Good luck!

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