Writing Covered Calls Now: ExxonMobil And Johnson & Johnson

Includes: JNJ, XOM
by: Regarded Solutions

I have been getting a significant number of direct messages about our options strategy. Specifically writing (or selling) covered calls.

I feel that by taking action NOW, and selling calls against the stocks we hold in our core portfolio (review here), we can dramatically increase the overall value of our portfolio, have additional cash reserves to deploy in other stocks, and even have spendable discretionary funds for anything we want.


I once read something somewhere, and for the life of me I cannot recall where, but at that very moment, I became a covered call mini monster!

The part I recall most said something like " if you saw a 20 dollar bill in the street, would you pick it up and put it in your wallet?" Found money, right?

Well, that is how I began writing covered calls on the stocks I already owned, OR was just purchasing.

I also remember calling my broker (yep I had a broker back then) and asked her why wasn't everyone doing this, and she had very few good answers that I could say, "ohhhhh, well that stinks, forget it!"

My option education began, and I will attempt to make it simple here so that my readers (hopefully lots of them) can learn something they might not know, be afraid of, or have never even thought about it.

Remember, that by implementing this action NOW, you immediately reap the benefits.

The Definition of Writing Covered Calls

The share holder sells options (calls) to give someone the rights to the shares at a defined price, by a particular date. The buyer of the calls pays a premium to the shareholder, which is the added income derived from actually owning the stock and implementing the strategy.

Stocks Owned and Calls to Sell Today

We have our portfolio that has been doing nicely (see the results here again) and there are 2 stocks in that portfolio that I really love to sell calls on.

1) ExxonMobil (XOM): Price- $80.03/share, Dividend Yield- 2.40%, ESS Rating-Bullish

Exxon Mobil Corporation (NYSE:<a href='http://seekingalpha.com/symbol/XOM' title='Exxon Mobil Corporation'>XOM</a>)
(Click to enlarge)

2) Johnson and Johnson (JNJ): Price- $64.00/share, Dividend Yield- 3.7%, ESS Rating- Bullish

Johnson & Johnson (NYSE:<a href='http://seekingalpha.com/symbol/JNJ' title='Johnson & Johnson'>JNJ</a>)
(Click to enlarge)

Review the option chains associated with each stock (JNJ option chain), (XOM option chain) and select one that seems right for you.

I usually choose to sell calls no more than 90 days away from their expiration date, which will be very clear as you look at the option chain, but there are times such as the ones I am suggesting now, to go further out than 90 days.

Sell the Following Calls Now

XOM: July 21st expiration, $90.00 strike price: Premium (cash) received per share- $1.85

JNJ: July 21st expiration, $67.50 strike price: Premium (cash) received per share- $1.65

Using our portfolio from my previous article, we have 100 shares of each. This will give us approximately $350 immediately on these 2 stocks alone, and we won't have to do anything (most likely) for the next 7 months.

Our return on XOM is 2.5% roughly, and 3% on JNJ. When the 2 quarters of dividends are paid for each, it virtually doubles that yield (or more).

We are also hedging our positions somewhat by reducing our net cost of each share by the premium we received, so there is SOME downside protection even without buying put options.

The upside is limited to the strike price, however I feel enough is baked into the calls that will give us a handsome return regardless. Then we can buy the shares back the very next trading day if we desire, or wait for a dip to re-add the stocks at a lower price. That is even sweeter when that happens!

My Opinion

The worst case scenarios:

1) The stocks take a huge hit, and you cannot sell them because you have promised them to the "call" buyer; unless you buy the calls back, and take action on the stocks themselves.

2) The stocks sky rocket and you missed the boat because they were 'called' away by the owner of the calls you sold. Which can be mitigated by rolling over the calls to a further out date as you get closer to expiration date.

Those are the two worst case scenarios that I can think of, and that I have personally faced as well.

I see this strategy as a valuable way to enhance a portfolio's overall value, and a tool that uses the stocks we already own, as leverage to have more income. Why not give it a shot?

* Please remember to do your own research before buying or selling any equity or option. This article is for educational purposes only and should not be used to make any investment decision without consulting a professional or deciding your investment goals yourself.

Disclosure: I am long XOM, JNJ. I have sold these covered calls for my own portfolio.