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In the endless search for yield, a covered-call strategy can be an effective tool to supplement portfolio performance. In addition to finding returns from call premium, I'll try to incorporate higher quality dividend stocks for a little something extra. The guidelines for the covered-call strategy are:

  • Generating more than 7% per year from the calls and dividends combined is the overall goal.

  • Call should be at least 7% out of the money (OTM) to avoid being called away and to give room for underlying movement.

  • Targeted expirations will be within four months. Optimally, calls will be written on the same underlying stock 3-4 times per year.

  • Buying back calls to close before expirations takes place will be taken into account; yields are calculated bid-$0.05.

The picks should be looked upon as yield generators to supplement longer-term equity holdings. The above are only guidelines, however, not rules. Before utilizing the strategy, make sure to study it and know the potential hiccups that may occur.

Annualized Call Yield performance can be calculated as such:

= (Call premium - 0.05 /Stock price)/Days to expiration*365

Prices current as of November 12, 2012 market close

Summary on selection:

The pressure is officially under way with the election over and fiscal cliff looming. As investors, if you were lucky enough to have caught the surge in financials over the last 6 months now is the time to write calls and protect those gains by generating some cushion income. This is the perfect time to use this strategy. The sector has had a great medium-term run. Volatility should remain high on legislative concerns going into the end of the year, while stocks should trade sideways and lower as buyers will sit out in the market place due to uncertainty. JP Morgan which has shown great returns since bottoming after the London whale fiasco, has proved its "fortress balance sheet" can take a beating, but beware of more choppy trading in the stock. My personal take on the financials is that they are underpriced but still too risky. I'm choosing calls in the December and January expiration months because they will provide an excellent chance to close out of before the cliff finally hits, and in turn give us an extra chance early in 2013 to re-write and possibly make even more income.

The criteria above should be looked upon as guidelines not rules, particularly for this article. Some of these ideas are less than 7% out-of-the-money and that is because I don't personally believe the underlying stocks can surge that high in the last months of 2012, especially after QE3 hasn't provided a powerful catalyst. As always these articles are not about recommending buys and sells of stocks, they are only to give ideas to assist in income generation by targeting specific calls.

Citigroup (C) December 39 call

TickerC
Strike39
Exp MonthDecember
Stock Price$36.42
Call Bid$0.52
Days to Expiration40
OTM7.08%
Call Yield1.29%
Annualized Call Yield11.78%
Annual Dividend Yield0.10%
Total Annual Yield11.88%

Goldman Sachs (GS) December 125 call

TickerGS
Strike125
Exp MonthDecember
Stock Price$117.24
Call Bid$1.28
Days to Expiration40
OTM6.62%
Call Yield1.05%
Annualized Call Yield9.57%
Annual Dividend Yield1.70%
Total Annual Yield11.27%

Wells Fargo (WFC) January 35 call

TickerWFC
Strike35
Exp MonthJanuary
Stock Price$32.37
Call Bid$0.40
Days to Expiration68
OTM8.12%
Call Yield1.08%
Annualized Call Yield5.80%
Annual Dividend Yield2.70%
Total Annual Yield8.50%

JP Morgan (JPM) January 44 call

TickerJPM
Strike44
Exp MonthJanuary
Stock Price$40.58
Call Bid$0.52
Days to Expiration68
OTM8.43%
Call Yield1.16%
Annualized Call Yield6.22%
Annual Dividend Yield3.00%
Total Annual Yield9.22%
Source: 4 Financial Covered Calls