The thesis of this article will be to discuss an income enhancement opportunity using covered calls with General Electric (GE). The strategy will require purchasing the underlying equity outright and selling a call at a higher strike price than what GE was purchased for. The anatomy of the trade will be discussed below.
GE Sep12 20 Call
Details
Today's Open | $19.09 |
Previous Close | $18.88 |
Day's Range | $18.96 - $19.19 |
52 Week range | $14.02 - $21.00 |
Beta | 1.60 |
Avg. Volume (10 Day) | 45,259,986 |
Put/Call Ratio (1 Day) | 0.5 |
Put/Call Ratio (30 Day) | 0.8 |
Earnings TTM (GAAP)
Earnings per Share (04/20/2012) | $1.2228 |
Price/Earnings | 15.44 |
Forward P/E | 12.17 |
Details
Dividends
Quarterly Div. (Ann. Yield) | $0.17 (3.60%) |
Previous Ex-Date | Feb 23, 2012 |
Previous Pay Date | Apr 25, 2012 |
Details
Shares
Market Capitalization (Large Cap) | $201.8B |
Shares Outstanding | 10,595.3M |
Shares Held By Institutions | 53% |
Info and charts provided by Charles Schwab
GE is currently quoted at roughly $19.10 (10am 6/7/2012), which will be the price used to enter into the trade. The investor would for example purchase 100 shares of GE to hold in their account. The investor would then sell 1 call at the 20 strike for 52 cents.
The investor who enters into the above mentioned position has two possible outcomes, both favorable in my view. If the stock is trading above 20 at the September expiration the stock will be "called" away and a credit of $2000 (20 times 100 shares) will be deposited into their brokerage account. The full premium for the option contract will be kept. So the gain would be thus 20-19.1 (purchase price) nets 90 cents. Ninety cents plus the option premium (.52) plus a dividend payment of (.17) nets out $1.59. $1.59 divided by the purchase price of $19.1 brings you a very acceptable gain of 8.32% before commissions. The total holding period would be 107 days since the contract would expire on 9/22/2012.
The second scenario would be the stock is trading below $20 and the contract would not be executed. The investor would keep the premium collected (52 cents) plus the quarterly dividend (17 cents). The investor at that point would be free to sell calls against the position, again netting additional premium.
I have used this strategy numerous times in the past with very satisfactory results. The strategy mentioned above is suitable for IRA accounts due to their conservative nature. Investors can't lose on the contract unless they sell the contract for less than they purchased the underlying security for. This strategy doesn't prevent losses due to the underlying shares dropping, so the strategy should be used strictly for companies that the investor is comfortable owning. I prefer to use this strategy with high-yielding companies such as Dow Chemical (DOW) and GE. Being able to capture a dividend along with the time premium gained for selling calls can significantly enhance overall portfolio performance.
Disclaimer: The above article is for informational purposes only. thanks for reading and I look forward to your comments. I have used the same strategy detailed above on Ge and Dow.
