How To Generate Extra Income From Bargain Shoppers

With volatility remaining stubbornly high, investors might be more interested in generating income rather than capital gains. 

With cost of living pressures rising, shoppers may be looking for ways to snap up a bargain. That could be good for stocks such as Tanger Factory Outlet Centers (SKT).

Tanger Factory Outlet Centers, Inc. is a fully-integrated, self-administered and self-managed real estate investment trust which focuses exclusively on developing, acquiring, owning and operating factory outlet centers. Since entering the factory outlet center business, they have become one of the largest owners and operators of factory outlet centers in the United States.

SKT pays a high dividend of 4.89% and sophisticated investors can generate an additional income by using options. The strategy is a known as a covered call which involves selling call options against a stock position.

The Barchart Technical Opinion rating for SKT is an 8% Buy with a weakening short term outlook on maintaining the current direction.

Let’s take a look at a  Covered Call Screener for SKT and analyze the results.

SKT Covered Call Example

When running the Covered Call Screener for SKT, we find the following results:

Let’s evaluate the first SKT covered call example. Buying 100 shares of SKT would cost $1,727. The December 16, 20 strike call option was trading yesterday around $0.20, generating $20 in premium per contract for covered call sellers. Selling the call option generates an income of 1.17% in 52 days, equalling around 8.07% annualized. That assumes the stock stays exactly where it is. What if the stock rises above the strike price of 20?

If SKT closes above 20 on the expiration date, the shares will be called away at 20, leaving the trader with a total profit of $293 (gain on the shares plus the $20 option premium received). That equates to an 18.5% return, which is 129.5% on an annualized basis.

That particular covered call allows for a lot of capital appreciation. What if an investor was more income focused? They would need to sell a call much closer to the stock price (look for a low value in the Moneyness column).

Instead of the December 20 call, let’s look at the December 18 call (third row). Selling the 18 call option for $0.65 generates an income of 3.91% in 52 days, equalling around 26.93% annualized.  If SKT closes above 18 on the expiration date, the shares will be called away at 18, leaving the trader with a total profit of $138 (gain on the shares plus the $65 option premium received).

That equates to a 9.6% return, which is 67.6% on an annualized basis.

Of course, the risk with the trade is that the SKT might drop, which could wipe out any gains made from selling the call.

Implied volatility is at 45.96% compared to a 12-month low of 32.69% and a 12-month high of 55.44%. 

Of the 5 analysts covering the stock, 1 has a Strong Buy rating, 2 have a Hold rating, 1 has a Moderate Sell rating and 1 has a Strong Sell rating.

SKT currently pays a dividend of 4.89%.

Please remember that options are risky, and investors can lose 100% of their investment.  This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

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