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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:

  • Generating 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 and to give room for underlying movement.
  • 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. hiccups 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 25, 2012 market close

Microsoft Corporation (NASDAQ:MSFT) October 31 call

Solid company and stock with some interesting products coming out. I like the newfound creativity instead of the old bland culture that plagued this bellwether tech while Apple Inc. (NASDAQ:AAPL) moved in over the last 10 years.

Strike31
Exp MonthOctober
Stock Price$28.83
Call Bid$0.43
Days to Expiration87
OTM7.53%
Call Yield1.32%
Annualized Call Yield5.53%
Annual Dividend Yield2.74%
Total Annual Yield8.27%

Exxon Mobil (XOM) September 90 call

This pick won't fit most of the rules above; however, from a technical standpoint, I feel comfortable. There is massive resistance keeping this stock below $90, the price action would need a major catalyst for a break through higher. With the global economic slowdown I am confident the price will not break through this level before the September expiration. Following this size of premium from the call writing for a year will hypothetically double the annual dividend; any investor would be happy with that result.

Strike90
Exp MonthSeptember
Stock Price$85.24
Call Bid$0.42
Days to Expiration59
OTM5.58%
Call Yield0.43%
Annualized Call Yield2.69%
Annual Dividend Yield2.70%
Total Annual Yield5.39%

JPMorgan Chase & Co. (NYSE:JPM) October 39 call

This stock has been beat up lately with the CIO debacle. Use the covered call premium as a stock repair strategy for now if you haven't decided to rid your portfolio of murky financials. This particular call and stock combo matches the rules I laid out above; the only issue may be personal opinions regarding the quality of this company's financial statements going forward (but I doubt JPM is going out of business).

Strike39
Exp MonthOctober
Stock Price$35.17
Call Bid$0.53
Days to Expiration87
OTM10.89%
Call Yield1.36%
Annualized Call Yield5.73%
Annual Dividend Yield3.67%
Total Annual Yield9.40%

Source: Covered Call: Microsoft, Exxon Mobil, JPMorgan