Intel And Microsoft: Keep Selling Calls To Increase Yield

Includes: INTC, MSFT, QCOM
by: Bill Maurer

As a follower of many technology names, I am always looking for ways to increase returns in this space. When it comes to many of the dividend payers, selling calls usually can increase your yields. I recommended this strategy back in March for both Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT). The strategy worked very well. By expiration, the main trade I pitched, selling $28 calls for Intel, worked with Intel closing at $27.40. Either the calls expired worthless, or you were forced to sell your Intel at $28, but received a $0.41 premium for doing so. At expiration, the trade looked good.

So today, I'm back to recommend that you continue selling call options for these names. It will increase the payout you are already receiving from them. Remember, Intel announced a dividend raise recently, so the name is currently yielding about 3.54% per year.

The following table shows the premium you would receive for selling Intel calls at various strikes over the next few expiration months. Remember that there will be commissions involved in these trades, so you should factor that into your decision as well. For my argument, I am not including commissions as they can vary widely.

INTC July August September October
$26 $0.70 $0.89 $1.11 $1.33
$27 $0.34 $0.51 $0.72 $0.91
$28 $0.15 $0.26 $0.44 $0.61
$29 $0.06 $0.13 $0.26 $0.39
$30 $0.02 $0.06 $0.14 $0.24
Click to enlarge

Intel closed Tuesday at $25.43, so I only used strikes above the current price. The 52-week high is $29.27, so you can use that as a frame of reference as well. Markets have come down recently, so you might think that Intel could rebound in the coming months. If that is the case, you might want to look at selling a higher strike call, say $28 instead of $26 perhaps. If you think the stock is going to be flat or decrease further, you definitely want to sell the $26 call, or one even lower possibly.

Intel's next dividend will get you 22.5 cents per share. The payout will most likely occur in early September, to shareholders of record sometime in early August. So let's target the September expiration for this example. If you sell the $28 call today, you receive $0.44 per contract, or $44 per 100 shares. You also get the $0.225 dividend. That leaves two possible scenarios.

  • Scenario 1: The stock closes below $28 by expiration. You get the dividend and the call premium, a total of $0.665 per share. Based on today's price, that's a yield of 2.62% in just over 3 months, which equates to about a 10% annual return.
  • Scenario 2: The stock closes above $28 by expiration and your shares are called away (you are forced to sell at $28). You have to sell your shares for $28, but you still receive the dividend and the call premium, so you really are selling for $28.665. That would be a gain of roughly 12.7% in just over three months (assuming you bought your shares at current prices).

Either way, it seems like a good strategy. 3-month treasuries are only yielding 0.05% currently, so short term fixed income doesn't seem like the way to go. Remember, you will lose some of your gains due to commissions, so actual returns could vary from the scenarios above.

The same basic strategy applies to Microsoft. I've provided a similar table below showing the Microsoft call option premiums.

MSFT July August September October
$29 $0.85 $1.09 $1.34 $1.56
$30 $0.47 $0.68 $0.91 $1.12
$31 $0.24 $0.39 $0.59 $0.78
$32 $0.12 $0.22 $0.37 $0.53
$33 $0.06 $0.11 $0.22 $0.34
Click to enlarge

Microsoft's 52-week high is $32.95, so keep that in mind. The company also pays a 20 cent quarterly dividend. Shares are currently at $28.50. I kind of like the $31 August call at the moment, but feel free to choose your own strategy.

You could even try this strategy with more of a growth technology name, such as Qualcomm (NASDAQ:QCOM). Qualcomm does pay a dividend, but is more dependent on revenue and earnings growth, so for the table below, I've provided some extra strike levels. I've only provided two expiration months as well.

QCOM July October
$57.50 $2.49 $4.15
$60.00 $1.40 $3.00
$62.50 $0.70 $2.09
$65.00 $0.33 $1.40
$67.50 $0.14 $0.91
$70.00 $0.05 $0.58
Click to enlarge

Qualcomm closed Tuesday at $57.18, after rallying more than $1.30. The 52-week high is $68.87, and the company pays a $0.25 quarterly dividend. If going with the July expiration, I would probably recommend the $62.50 strike. For October, it might be worth going a little higher.

Selling calls can help add income to any portfolio, but remember, options trading always carries a large amount of risk. Before executing any trade, always know the parameters of your trade, including what your profit/loss scenarios are, the timing of the trade, and any possible margin requirements there may be.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.