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.
