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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 13, 2012 market close

Summary on selection:

I tend to utilize a swing trading mentality, taking profit from mid term ups and downs which occur over a few months, rather than years. I've decided to write this article about commodity ETFs which present unique ways to diversify our portfolio and also present swing trading profit potential. I'm not recommending buying or selling any of these at the moment, but I do like the favorable low levels that oil has been slipping to as of late. It's my position that it is only inevitable until oil rises on supply shocks from the Middle East or demand from economic recovery swings. The same reasoning applies to the gasoline fund I've listed below as well. I try to write an update featuring SLV and GLD every couple weeks because there are a huge number of investors holding these as inflation hedges among other reasons. While you are waiting for gold and silver markets to start bulldozing to higher highs, write a call with a close expiration to generate income. Positive carry trades are always ideal and that's what I'm going for with this strategy. I've decided to keep the expirations on these contracts close to December and January in order to give you a chance to close out as early as possible and hopefully re-write the calls. Hope you all can find some use in this commodity fund themed article.

SPDR Gold Trust (GLD) January 178 call

*Be mindful of how close this call is to the underlying price. It is very possible for gold to move up through the strike before expiration, negating any profits.

TickerGLD
Strike175
Exp MonthJanuary
Stock Price$167.09
Call Bid$1.55
Days to Expiration67
OTM4.73%
Call Yield0.90%
Annualized Call Yield4.89%
Annual Dividend Yield0.00%
Total Annual Yield4.89%

iShares Silver Trust (SLV) January 34 call

TickerSLV
Strike34
Exp MonthJanuary
Stock Price$31.39
Call Bid$0.47
Days to Expiration67
OTM8.31%
Call Yield1.34%
Annualized Call Yield7.29%
Annual Dividend Yield0.00%
Total Annual Yield7.29%

United States Gasoline Fund (UGA) December 59 call

TickerUGA
Strike59
Exp MonthDecember
Stock Price$55.00
Call Bid$0.65
Days to Expiration39
OTM7.27%
Call Yield1.09%
Annualized Call Yield10.21%
Annual Dividend Yield0.00%
Total Annual Yield10.21%

United States Natural Gas Fund (UNG) December 24 call

TickerUNG
Strike24
Exp MonthDecember
Stock Price$22.01
Call Bid$0.38
Days to Expiration39
OTM9.04%
Call Yield1.50%
Annualized Call Yield14.03%
Annual Dividend Yield0.00%
Total Annual Yield14.03%

United States Oil Fund (USO) December 33.5 call

TickerUSO
Strike33.5
Exp MonthDecember
Stock Price$31.42
Call Bid$0.45
Days to Expiration39
OTM6.62%
Call Yield1.27%
Annualized Call Yield11.91%
Annual Dividend Yield0.00%
Total Annual Yield11.91%
Source: 5 Commodity ETF Covered Calls