Options Trading on SCHD?

Hello again everyone, I hope as we make our last push into 2024 you’re able to see God at work in your life. Maybe its just me, but 2024 has felt like the longest year ever and I know I’m searching desperately for all the ways God is at work in my own life. It’s been hard to see at times but I’m trusting and encouraging everyone today, just keep going! In His time we’ll get to see all the miracles He’s been weaving together for our good this entire time.

Well, with that let’s turn our attention to SCHD, or the Schwab Dividend Equity Premium ETF. Last Friday, Schwab decided to cut the price of several of it’s ETF’s to make them more affordable and attractive to the masses. In doing so, they’ve just created an ETF that’s actually worth owning at a price millions more will enjoy.

So, in today’s post I want to explore options trading on SCHD and why it just might be an excellent opportunity.

Key Benefits to Options Trading on SCHD

First, and the most obvious in my opinion is the new lower share price. By splitting the shares 3 for 1 they’ve made it possible for virtually anyone to employ an options trading strategy on SCHD that may have previously been out of reach. Volume and open interest in the SCHD options market had been improving prior to the split, now it may take off.

Next, SCHD is an ETF that millions already own and are actively choosing to own. Prior to this split the only comparable ETF at this price point was maybe SLV, the silver ETF.

Lastly, SCHD pays an attractive dividend to accompany the options premium. For an income investor who probably already owns SCHD the possibility of adding additional income just makes sense. Of course, only time will tell if others are viewing it the way I am now.

Drawbacks to Options Trading on SCHD

As it is with any options trading strategy, there are a few disadvantages to keep an eye on. First, if owning the shares is probable then capping the upside with say, a covered call, could mean leaving appreciation on the table. However, that isn’t a con solely limited to SCHD so it isn’t one that I’d let deter my intention.

Another downside to committing capital here rather than somewhere else is the pedestrian level of volatility. SCHD isn’t a volatile ETF, which is why I like it, but it means premiums will be lower than you’ll find elsewhere. That said, should we find ourselves in a cash secured put position here we wouldn’t lose much sleep worrying about a major decline either. Any major declines in SCHD means there is probably a larger problem in the overall market. For that, have a look at this recent post I wrote about hedging, “Ratio Spread Hedge – Hope for the Best, Prepare for the Worst”.

Lastly, while volume has increased significantly from where it was a year ago it still isn’t what I’d call comfortable for most strikes. I do think that will continue to improve given the new lower share price but it is something to look out for.

Comparable ETF’s to SCHD

As I’ve already mentioned, there are generally very few ETF’s for a more conservative options trader at this price point. Outside of specific exposure needs most ETF’s in this price range just don’t have any place in my portfolio and possibly yours as well.

In any case, there are a few ETF’s at this price that may offer something to be considered.

SLV – Silver Trust ETF
EWZ – Brazil ETF
URA – Uranium ETF
FXI – China ETF
GDX – Gold Miners ETF

Each of these ETF’s offers the trader an attractive options market at a similar price point. However, from a long term perspective its worth noting that from inception in 2011 SCHD is up around 244%. SLV is down 15% over that time frame. EWZ is down 52%. URA is down 51%. FXI is down 8%, and GDX is down 32%. Hardly much of a choice in my opinion. Options trading on SCHD makes much more sense because it’s actually a decent investment. At this price, I can’t help but assume more will take notice and begin trading options here as well.

Regardless, the assets listed above do have at least one thing SCHD doesn’t, volatility. The premium available for each listed is just better and there isn’t any other way to say that. For example, SLV offers $.92 for an ATM put with 32 DTE, that same expiration on SCHD currently offers only $.25. Thus, if income is the sole requirement then SCHD may not be the preferred asset.

Options Trading Strategies to Consider

Determining which options strategy is best would come down to each individual investor but for me there are two primary strategies. First, cash secured puts here make good sense in my opinion and in this case we’re finally getting an ETF we wouldn’t mind owning long term. Hardly a sentiment I’ve shared with many of the other cash secured puts I’ve sold.

The next strategy is a simple covered call or if preferred we can put both strategies together to comprise the wheel strategy. Trading the wheel strategy on an ETF like SCHD means even if we’re left holding the bag for a period of time, we’ll still collect a respectable dividend each quarter. As I write this today, owning 100 shares of SCHD would provide about $25 dollars each quarter or $100 dollars of additional income each quarter. Add in any options premium and it wouldn’t be unreasonable to think we could secure a few hundred dollars of additional income from this investment.

Lastly, before we move on. I personally would avoid any other complex options strategies on SCHD. I think its important to view SCHD for what it is, a long term buy and hold asset that will spin off a respectable level of income. It won’t return the most income, that’s for sure, there are far higher yielding assets out there. Even some that offer upside potential. However, the possibility of boosting my income on 100 shares from $100 with just the dividend to potentially $2-300 each year is incredible from where I stand.

Final Thoughts

Well, I think that wraps up today’s post and I feel I’ve made a reasonable case for considering options trading on SCHD. For me, the idea of having an ETF that I already own in this price range is just remarkable. I like to think I’m selective when it comes to my investments but until now most ETF’s I own are priced above $100. Which means, employing a covered call would occupy at least $10,000 dollars of capital and that really doesn’t fit my allocation model given my available capital.

Finally, and something I probably should have said sooner is that at this lower price its far more possible now to own more than 100 shares. As we all know the greatest drawback to the wheel strategy on any asset is a large market move. Owning a put and having the price crater means buying shares at above market value. Selling a call and having price climb above the strike means selling below market value. Not great either way. However, now that SCHD is more cost effective, it’s also easier to average our cost down. And still occupy less capital than before.

As I close, I’ll leave you with this thought. Imagine you own 100 shares of SCHD and you sold an OTM call for $15 in premium. Hardly reason to celebrate in the short term. $15 dollars doesn’t buy much these days. But what if you also sold an OTM cash secured put, for another $15 dollars in premium. For less than the pre-split share price we’re now able to earn, conservatively OTM, about $30 dollars extra per month. All for an investment we were going to make anyway.

Just some food for thought, but until the next post.

God bless,

Jeff