6 Gold/Silver Related Covered Calls

Includes: ABX, AUY, GG, GLD, NEM, SLV
by: Covered Call Strategies

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 December 3, 2012 market close

Summary on selection:

I felt it pertinent to write an article focusing on gold and silver related stocks. Many of you have been holding certain companies and ETFs waiting for them to move higher on buying in a flight to safety (risk off). I tend to think the best investment is GLD instead of playing single companies when playing this kind of strategy. However, single companies in this sector tend to be volatile and therefore their calls will be priced higher. Trying to gain exposure to gold for use as an inflation hedge and store of value should be a major thought in every investor's planning process.

There is a lot of great premium to be collected out there. I picked 4 of the largest and most liquid gold/silver related companies for this article because it is likely that many of you hold at least one. Most of these stocks have been beaten down in the last 3 months, giving you the perfect reason to generate income on a solid holding. I kept the strike prices as close to 7% OTM as possible because I don't think these stocks will explode higher in the next few months.

As always, I don't write these to recommend certain buys and sells of stocks, I'm only helping target certain calls for income generation.

Goldcorp. Inc (GG) January 40 call

Ticker GG
Strike 40
Exp Month January
Stock Price $37.49
Call Bid $0.85
Days to Expiration 47
OTM 6.70%
Call Yield 2.13%
Annualized Call Yield 16.57%
Annual Dividend Yield 1.44%
Total Annual Yield 18.01%

Yamana Gold (AUY) January 20 call

Ticker AUY
Strike 20
Exp Month January
Stock Price $18.35
Call Bid $0.35
Days to Expiration 47
OTM 8.99%
Call Yield 1.63%
Annualized Call Yield 12.70%
Annual Dividend Yield 1.40%
Total Annual Yield 14.10%

Barrick Gold (ABX) January 36 call

Ticker ABX
Strike 36
Exp Month January
Stock Price $33.70
Call Bid $0.62
Days to Expiration 47
OTM 6.82%
Call Yield 1.69%
Annualized Call Yield 13.14%
Annual Dividend Yield 2.37%
Total Annual Yield 15.51%

Newmont Mining (NEM) January 49 call

Ticker NEM
Strike 49
Exp Month January
Stock Price $45.69
Call Bid $0.65
Days to Expiration 47
OTM 7.24%
Call Yield 1.31%
Annualized Call Yield 10.20%
Annual Dividend Yield 3.00%
Total Annual Yield 13.20%

iShares Silver Trust (SLV) February 34.5 call

Ticker SLV
Strike 34.5
Exp Month February
Stock Price $32.53
Call Bid $0.65
Days to Expiration 75
OTM 6.06%
Call Yield 1.84%
Annualized Call Yield 8.98%
Annual Dividend Yield 0.00%
Total Annual Yield 8.98%

SPDR Gold Trust (GLD) February 176 call

This idea has a very low return relatively. But since so many people hold it, I felt it necessary to include.

Ticker GLD
Strike 176
Exp Month February
Stock Price $166.10
Call Bid $1.00
Days to Expiration 75
OTM 5.96%
Call Yield 0.57%
Annualized Call Yield 2.78%
Annual Dividend Yield 0.00%
Total Annual Yield 2.78%

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.