This article discusses 5 covered call investments for monthly income. The covered call trade is simply buying 100 or more shares of an underlying stock and simultaneously selling 1 or more call option for premium income. These covered call setups all have an expiration in January 2012 so they have 30 days of trade time until expiration. The table below shows the trade setups with cost and return information for each trade suggestion. Here is a trade description on each covered call trade.
Amgen Inc. (AMGN), a biotechnology medicines company, discovers, develops, manufactures, and markets human therapeutics based on advances in cellular and molecular biology for grievous illnesses primarily in the United States, Europe, and Canada. Look at the January 2012 62.5 covered call. For each 100 shares of Amgen stock you buy, sell one January 2012 62.5 covered call option for a $60.88 (62.31 – 1.43) debit or better. That's potentially a 2.7% assigned return over 30 days. S&P maintains a Buy opinion on shares of AMGN. AMGN and Watson Pharmaceuticals (WPI) enter into global collaboration to develop and market oncology antibody biosimilar medicines. AMGN will assume lead responsibilities, and WPI will contribute up to$400M in development costs, share in product risks and earn sales royalties. The deal excludes AMGN's proprietary products. We do not expect biosimilars to reach the market for several years and view their commercial prospects as uncertain, but we think AMGN's expertise in biologics manufacturing and WPI's in complex generics markets will provide long-term strategic value to AMGN.
EMC Corporation (EMC) develops, delivers, and supports the information and virtual infrastructure technologies and solutions. Look at the January 2012 21 covered call. For each 100 shares of EMC Corporation stock you buy, sell one January 2012 21 covered call option for a 20.54 (21.44 - 0.90) debit or better. That's potentially a 2.2% assigned return over 30 days. S&P raises recommendation on shares of EMC to strong buy from hold. We believe EMC will be one of the biggest beneficiaries of the continued growth of enterprise storage, which is projected to rise 47% per year through 2015, according to IDC, an independent research firm. Thus, we think datacenter upgrades will remain as a top IT spending priority in 2012. Besides gaining market share in the high-end segment, we believe EMC is making inroads in the mid-tier market with its VNX unified storage product lines. We raise our '11 operating EPS estimate $0.04 to $1.26, '12's by $0.19 to $1.53, and our target price by $1 to $28.
Huntsman Corporation (HUN) engages in the manufacture and sale of differentiated organic and inorganic chemical products worldwide. Its products comprise a range of chemicals and formulations, which are marketed to consumer and industrial customers. Look at the January 2012 10 covered call. For each 100 shares of Huntsman Corporation stock you buy, sell one January 2012 10 covered call option for a 9.12 (9.47 – 0.35) debit or better. That's potentially a 9.6% assigned return over 30 days. This is a higher risk trade as the historical volatility (HV) is over 50 (see table below) so its price will move more than a lower HV stock. S&P maintains buy opinion on shares of Huntsman Corp. We reduce our '11 EPS estimate to $1.72 from $1.77, and '12's to $1.89 from $2.00, on a more conservative outlook for sales and margins. Based on the revision to our '12 estimate, we cut our 12-month target price by $5, to $13. The projected P/E on our new target price and revised estimate would be at the low end of the historical range. Given a more slowly growing world economy and HUN's high debt levels, we think the stock will carry a low valuation. However, we think HUN is attractively valued trading at about 5X our '12 estimate, with a dividend yield of about 4%.
Crown Castle International Corp. (CCI), through its subsidiaries, owns, operates, and leases towers and other wireless infrastructure primarily in the United States and Australia. Its infrastructure includes distributed antenna system (DAS) networks, as well as rooftop installations. Look at the January 2012 44 covered call. For each 100 shares of Crown Castle International stock you buy, sell one January 2012 44 covered call option for a 42.85 (43.85 – 1.00) debit or better. That's potentially a 2.7% assigned return in 30 days. S&P maintains strong buy opinion on shares of Crown Castle. CCI announced it plans to acquire privately held NextG Networks for roughly $1B. NextG is one of the largest DAS (distributed antenna systems) with over 7,000 nodes-on-air, 1,500 under construction and 4,600 miles of fiber. With NextG's 1.25 tenants per network, we believe there is significant room for new tenants. We think the deal will be accretive and CCI plans to finance the acquisition by issuing debt. We expect the deal to close in the second quarter of 2012 and view it a positive as we think it should allow CCI to meet demand as data traffic increases.
Discover Financial Services (DFS), a bank holding company, offers direct banking and payment services in the United States. It operates in two segments: Direct Banking and Payment Services. Look at the January 2012 24 covered call. For each 100 shares of Discover Financial Services stock you buy, sell one January 2012 24 covered call option for a 23.21 (24.01 – 0.80) debit or better. That's potentially a 3.4% assigned return in 30 days. This stock also pays a $0.10 quarterly dividend which may add another 1% to the return. The stock's next ex-dividend date is 12/27/2011. S&P maintains buy opinion on shares of Discover Financial Services. Q4 EPS of $0.95, vs. $0.64, beats our $0.84 estimate on credit quality improvement and receivables growth, offsetting an 18 basis point net interest margin contraction. Given our view that fundamentals are generally healthy, we maintain our $32 target price, based on a moderate discount to peers 9X our unchanged FY 12 (Nov.) EPS estimate of $3.58. The dividend was increased 67% to $0.10 per share, boosting the yield to about 1.7%.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.