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 take 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 11, 2012 market close
Summary on selection:
If you're a tech sector investor, recent volatility has helped by inflating premiums of calls, which we will use to generate income. The NASDAQ has been the leading index, and looks poised for a recovery into the new year. I've chosen a few companies that displayed gains Tuesday. MSFT was up 1.41%, NFLX was up 1.51%, QCOM was up .66%, and IBM was up 0.82%.
The Netflix contract is my personal favorite below. Tons of premium in the call, which enables us to write further out-of-the-money, over 13%. If you think NFLX will stay below $97.50 per share until after January 19th, then consider taking this trade.
Lately, I've been trying to keep expiration months as early as possible to allow for multiple re-writes, and also to help try to manage the complications due to the fiscal cliff approaching. As always, these article are not recommending buys and sells of stocks, I am simply helping target call contracts that will greatly help generate income in a difficult market.
IBM (IBM) April 205 call
Not quite as far OTM as I like, but this is a slower moving stock, so it's worth a look.
|Days to Expiration||130|
|Annualized Call Yield||4.48%|
|Annual Dividend Yield||1.75%|
|Total Annual Yield||6.23%|
Qualcomm (QCOM) January 67.50 call
|Days to Expiration||39|
|Annualized Call Yield||6.54%|
|Annual Dividend Yield||1.55%|
|Total Annual Yield||8.09%|
Netflix (NFLX) January 97.5 call
|Days to Expiration||39|
|Annualized Call Yield||24.26%|
|Annual Dividend Yield||0.00%|
|Total Annual Yield||24.26%|
Microsoft (MSFT) February 29 call
|Days to Expiration||67|
|Annualized Call Yield||6.98%|
|Annual Dividend Yield||3.36%|
|Total Annual Yield||10.34%|