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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 December 5, 2012 market close

Summary on selection:

If you're a long-term holder of energy companies, now is a great time write calls with volatility high on Middle East and global economic plateau fears. The uncertainty will be high as long as there are political conflicts, which premiums will benefit from. 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 U.S., where demand will remain high.

Some of these contracts provide a relatively low return in terms of my rules above, but are worth looking at if you're a long-term holder. Generating some income is always better none. 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.

Conoco Phillips (COP) February 60 call

TickerCOP
Strike60
Exp MonthFebruary
Stock Price$57.35
Call Bid$0.67
Days to Expiration73
OTM4.62%
Call Yield1.08%
Annualized Call Yield5.41%
Annual Dividend Yield4.60%
Total Annual Yield10.01%

Marathon (MRO) January 33 call

TickerMRO
Strike33
Exp MonthJanuary
Stock Price$30.72
Call Bid$0.30
Days to Expiration45
OTM7.42%
Call Yield0.81%
Annualized Call Yield6.60%
Annual Dividend Yield2.30%
Total Annual Yield8.90%

Halliburton (HAL) January 36 call

TickerHAL
Strike36
Exp MonthJanuary
Stock Price$33.58
Call Bid$0.39
Days to Expiration45
OTM7.21%
Call Yield1.01%
Annualized Call Yield8.21%
Annual Dividend Yield1.10%
Total Annual Yield9.31%

Chevron (CVX) March 115 call

TickerCVX
Strike115
Exp MonthMarch
Stock Price$106.45
Call Bid$0.85
Days to Expiration101
OTM8.03%
Call Yield0.75%
Annualized Call Yield2.72%
Annual Dividend Yield3.50%
Total Annual Yield6.22%

BP (BP) January 44 call

TickerBP
Strike44
Exp MonthJanuary
Stock Price$41.31
Call Bid$0.35
Days to Expiration45
OTM6.51%
Call Yield0.73%
Annualized Call Yield5.89%
Annual Dividend Yield5.30%
Total Annual Yield11.19%

Exxon Mobile (XOM) April 95 call

TickerXOM
Strike95
Exp MonthApril
Stock Price$88.00
Call Bid$0.65
Days to Expiration136
OTM7.95%
Call Yield0.68%
Annualized Call Yield1.83%
Annual Dividend Yield2.60%
Total Annual Yield4.43%

Source: 6 Energy Covered Calls