6 Energy Covered Calls

Includes: BP, COP, CVX, HAL, MRO, XOM
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 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

Ticker COP
Strike 60
Exp Month February
Stock Price $57.35
Call Bid $0.67
Days to Expiration 73
OTM 4.62%
Call Yield 1.08%
Annualized Call Yield 5.41%
Annual Dividend Yield 4.60%
Total Annual Yield 10.01%

Marathon (MRO) January 33 call

Ticker MRO
Strike 33
Exp Month January
Stock Price $30.72
Call Bid $0.30
Days to Expiration 45
OTM 7.42%
Call Yield 0.81%
Annualized Call Yield 6.60%
Annual Dividend Yield 2.30%
Total Annual Yield 8.90%

Halliburton (HAL) January 36 call

Ticker HAL
Strike 36
Exp Month January
Stock Price $33.58
Call Bid $0.39
Days to Expiration 45
OTM 7.21%
Call Yield 1.01%
Annualized Call Yield 8.21%
Annual Dividend Yield 1.10%
Total Annual Yield 9.31%

Chevron (CVX) March 115 call

Ticker CVX
Strike 115
Exp Month March
Stock Price $106.45
Call Bid $0.85
Days to Expiration 101
OTM 8.03%
Call Yield 0.75%
Annualized Call Yield 2.72%
Annual Dividend Yield 3.50%
Total Annual Yield 6.22%

BP (BP) January 44 call

Ticker BP
Strike 44
Exp Month January
Stock Price $41.31
Call Bid $0.35
Days to Expiration 45
OTM 6.51%
Call Yield 0.73%
Annualized Call Yield 5.89%
Annual Dividend Yield 5.30%
Total Annual Yield 11.19%

Exxon Mobile (XOM) April 95 call

Ticker XOM
Strike 95
Exp Month April
Stock Price $88.00
Call Bid $0.65
Days to Expiration 136
OTM 7.95%
Call Yield 0.68%
Annualized Call Yield 1.83%
Annual Dividend Yield 2.60%
Total Annual Yield 4.43%

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.