Maximizing Income with American Water Works: A Look at Covered Calls

For shareholders of American Water Works Co, Inc. (Symbol: AWK), there are ways to enhance income beyond the stock’s annual dividend yield of 2.5%. One option is to sell the June covered call at the $130 strike price. This strategy allows them to collect a premium of $4.10, translating to an annualized return of about 9.4% against the current stock price. When combined with the existing dividend yield, this could increase the total potential annualized return to 11.9%, assuming the stock is not called away. However, if the stock does rise above $130, shareholders might miss out on any additional upside. Importantly, the stock would need to increase by 4.3% for the shares to be called away, which would still yield a return of 7.6% alongside any previously collected dividends.

Dividend payouts are often unpredictable, fluctuating based on a company’s profitability. For American Water Works Co, Inc., examining the dividend history chart below can provide insight into whether the latest dividend is likely to continue and whether a 2.5% yield is a reasonable expectation.

The following chart illustrates AWK’s trading history over the past twelve months, highlighting the $130 strike in red:

Analyzing the chart, along with the stock’s historical volatility, can help determine if selling the June covered call at the $130 strike carries a favorable risk-reward balance. As a point of reference, the trailing twelve-month volatility for American Water Works Co, Inc. is calculated at 21%, based on the last 250 trading days as well as the current price of $124.43. For additional call options ideas at different expirations, investors can visit the AWK Stock Options page at StockOptionsChannel.com.

In mid-afternoon trading on Wednesday, the put volume for S&P 500 components reached 1.17 million contracts, whereas call volume was recorded at 2.07 million, making the put-call ratio 0.56 for that day. This indicates a higher preference for call options relative to puts, especially compared to the long-term median put-call ratio of 0.65.

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The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.