Seeking Alpha
Long/short equity, long only, short only, deep value
Profile| Send Message|
( followers)

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 4, 2012 market close

Summary on selection:

I decided to focus on the food industry Tuesday after DRI took a massive hit, ending almost -10% on the day. I am actually a long-term holder of the stock and think it fits well into my general strategy for covered call selling. The dividend is high and although there was a bump in the road, it is a viable long-term company. I closed my previous calls on the stock Tuesday morning and found a new contract worth selling immediately.

I've decided to include a couple other food service companies, CMG is more of a growth play while YUM is closer to DRI. As always I'm not recommending buys and sells of certain stocks, these articles are only to help target calls for income generation in turbulent markets.

Yum! Brands (YUM) January 70 call

Exp MonthJanuary
Stock Price$65.89
Call Bid$0.66
Days to Expiration46
Call Yield0.93%
Annualized Call Yield7.35%
Annual Dividend Yield2.00%
Total Annual Yield9.35%

Chipotle (CMG) January 290 call

Exp MonthJanuary
Stock Price$271.51
Call Bid$4.80
Days to Expiration46
Call Yield1.75%
Annualized Call Yield13.88%
Annual Dividend Yield0.00%
Total Annual Yield13.88%

Darden Industries (DRI) January 50 call

Exp MonthJanuary
Stock Price$47.40
Call Bid$0.60
Days to Expiration46
Call Yield1.16%
Annualized Call Yield9.21%
Annual Dividend Yield3.80%
Total Annual Yield13.01%

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.

Source: 3 Food Industry Covered Calls