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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 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

TickerBP
Strike44
Exp MonthJanuary
Stock Price$41.20
Call Bid$0.40
Days to Expiration61
OTM6.80%
Call Yield0.85%
Annualized Call Yield5.08%
Annual Dividend Yield5.24%
Total Annual Yield10.32%

Chevron (CVX) January 110 call

TickerCVX
Strike110
Exp MonthJanuary
Stock Price$104.35
Call Bid$0.90
Days to Expiration61
OTM5.41%
Call Yield0.81%
Annualized Call Yield4.87%
Annual Dividend Yield3.45%
Total Annual Yield8.32%

Valero (VLO) January 33 call

TickerVLO
Strike33
Exp MonthJanuary
Stock Price$30.11
Call Bid$0.55
Days to Expiration61
OTM9.60%
Call Yield1.66%
Annualized Call Yield9.94%
Annual Dividend Yield2.35%
Total Annual Yield12.29%

Halliburton (HAL) January 34 call

TickerHAL
Strike34
Exp MonthJanuary
Stock Price$31.69
Call Bid$0.55
Days to Expiration61
OTM7.29%
Call Yield1.58%
Annualized Call Yield9.44%
Annual Dividend Yield1.13%
Total Annual Yield10.57%

Marathon (MRO) January 33 call

TickerMRO
Strike33
Exp MonthJanuary
Stock Price$31.12
Call Bid$0.53
Days to Expiration61
OTM6.04%
Call Yield1.54%
Annualized Call Yield9.23%
Annual Dividend Yield2.18%
Total Annual Yield11.41%
Source: 5 Energy Covered Calls