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 19, 2012 market close
Summary on selection:
I've seen a lot of news focused on oil related companies today due to the conflict in the Middle East. If you're a long-term holder of energy companies and had your positions beaten up over the last two weeks with the pull down in oil prices now is a great time write calls. The fear and uncertainty will be high as long as the war persists, so premiums will benefit from that. Volatility can be a huge asset when played correctly, taking advantage of it will greatly help in your returns.
I'm writing this article specifically to help you investors who are worried about further down moves, who don't panic and ditch solid holdings, but rather generate income to supplement your portfolio while you sit tight. All companies listed below have strong business models and will continue to going through the Middle East conflicts (they've all survived multiple instances of similar events) and these companies all also have strong presences in the US where demand will remain high.
I've chosen to keep the expiration months on these calls as early as possible to allow for closing and re-writing. As always these articles are not to recommend buys or sells of stocks, only to help target call contracts that can be used to generate extra income.
BP (BP) January 44 call
| Ticker | BP |
| Strike | 44 |
| Exp Month | January |
| Stock Price | $41.20 |
| Call Bid | $0.40 |
| Days to Expiration | 61 |
| OTM | 6.80% |
| Call Yield | 0.85% |
| Annualized Call Yield | 5.08% |
| Annual Dividend Yield | 5.24% |
| Total Annual Yield | 10.32% |
Chevron (CVX) January 110 call
| Ticker | CVX |
| Strike | 110 |
| Exp Month | January |
| Stock Price | $104.35 |
| Call Bid | $0.90 |
| Days to Expiration | 61 |
| OTM | 5.41% |
| Call Yield | 0.81% |
| Annualized Call Yield | 4.87% |
| Annual Dividend Yield | 3.45% |
| Total Annual Yield | 8.32% |
Valero (VLO) January 33 call
| Ticker | VLO |
| Strike | 33 |
| Exp Month | January |
| Stock Price | $30.11 |
| Call Bid | $0.55 |
| Days to Expiration | 61 |
| OTM | 9.60% |
| Call Yield | 1.66% |
| Annualized Call Yield | 9.94% |
| Annual Dividend Yield | 2.35% |
| Total Annual Yield | 12.29% |
Halliburton (HAL) January 34 call
| Ticker | HAL |
| Strike | 34 |
| Exp Month | January |
| Stock Price | $31.69 |
| Call Bid | $0.55 |
| Days to Expiration | 61 |
| OTM | 7.29% |
| Call Yield | 1.58% |
| Annualized Call Yield | 9.44% |
| Annual Dividend Yield | 1.13% |
| Total Annual Yield | 10.57% |
Marathon (MRO) January 33 call
| Ticker | MRO |
| Strike | 33 |
| Exp Month | January |
| Stock Price | $31.12 |
| Call Bid | $0.53 |
| Days to Expiration | 61 |
| OTM | 6.04% |
| Call Yield | 1.54% |
| Annualized Call Yield | 9.23% |
| Annual Dividend Yield | 2.18% |
| Total Annual Yield | 11.41% |
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
