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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 27, 2012 market close

Summary on selection:

The pressure is on now that the market has dipped, providing good entry areas and also greats spots to write calls on beaten up names. 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. While most of the financial sector has enjoyed a nice run up since the summer, long-term investors still may be looking to bolster returns and provide downside cushion.

The fiscal cliff isn't the only problem this sector faces, legislation to dismantle prop trading desks and thereby reduce risk will hit the profitablility of these behemoths. Take the chance to earn some extra income. I've chosen these companies specifically because they are the most widely held and therefore the options will be more liquid. The volatility within the calls is also inflated right now, making them more attractive candidates than smaller companies within the same industry.

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 past these strikes before January expiration, 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) January 38 call

Exp MonthJanuary
Stock Price$35.04
Call Bid$0.57
Days to Expiration53
Call Yield1.48%
Annualized Call Yield10.22%
Annual Dividend Yield0.10%
Total Annual Yield10.32%

Morgan Stanley (MS) January 17.5 call

Exp MonthJanuary
Stock Price$16.63
Call Bid$0.47
Days to Expiration53
Call Yield2.53%
Annualized Call Yield17.39%
Annual Dividend Yield1.20%
Total Annual Yield18.59%

Wells Fargo (WFC) January 35 call

Exp MonthJanuary
Stock Price$32.63
Call Bid$0.25
Days to Expiration53
Call Yield0.61%
Annualized Call Yield4.22%
Annual Dividend Yield2.70%
Total Annual Yield6.92%

Goldman Sachs (NYSE:GS) January 130 call

Another viable option is the Jan 125, the 130 is the safer contract though.

Exp MonthJanuary
Stock Price$118.40
Call Bid$0.85
Days to Expiration53
Call Yield0.68%
Annualized Call Yield4.65%
Annual Dividend Yield1.70%
Total Annual Yield6.35%

JP Morgan (JPM) January 43 call

Exp MonthJanuary
Stock Price$40.75
Call Bid$0.55
Days to Expiration53
Call Yield1.23%
Annualized Call Yield8.45%
Annual Dividend Yield2.90%
Total Annual Yield11.35%
Source: Financial Covered Calls: C, MS, WFC, GS, JPM