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:
- Generate more than 7% per year from the calls and dividends combined is the overall goal.
- Call should be at least 8% out of the money, to avoid being called away.
- Targeted expirations will be within 4 months. Optimally calls will be written on the same underlying 3-4 times per year.
- Buying back calls to close before expirations takes 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 hick-ups that may occur.
Annualized Call Yield performance can be calculated as such:
= (Call premium/Stock price)/Days to expiration*365
Prices current as of June 19, 2012 market close
Macy's Inc. (M) - August 40 Call
| Strike | 40 |
| Exp Month | August |
| Stock Price | $37.17 |
| Call Bid | $0.72 |
| Days to Expiration | 59 |
| OTM | 7.61% |
| Call Yield | 1.80% |
| Annualized Call Yield | 11.15% |
| Annual Dividend Yield | 2.19% |
| Total Annual Yield | 13.34% |
Tiffany & Co. (TIF) - August 60 Call
| Strike | 60 |
| Exp Month | August |
| Stock Price | $53.70 |
| Call Bid | $0.42 |
| Days to Expiration | 59 |
| OTM | 11.73% |
| Call Yield | 0.69% |
| Annualized Call Yield | 4.26% |
| Annual Dividend Yield | 2.38% |
| Total Annual Yield | 6.64% |
Verizon Communications (VZ) - October 46 Call
| Strike | 46 |
| Exp Month | October |
| Stock Price | $43.73 |
| Call Bid | $0.41 |
| Days to Expiration | 122 |
| OTM | 5.19% |
| Call Yield | 0.82% |
| Annualized Call Yield | 2.46% |
| Annual Dividend Yield | 4.56% |
| Total Annual Yield | 7.02% |
Apple Inc. (AAPL) - September 630 Call
| Strike | 630 |
| Exp Month | September |
| Stock Price | $587.41 |
| Call Bid | $17.75 |
| Days to Expiration | 94 |
| OTM | 7.25% |
| Call Yield | 3.01% |
| Annualized Call Yield | 11.70% |
| Annual Dividend Yield | 0.00% |
| Total Annual Yield | 11.70% |
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
