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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.

  • Calls 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 30, 2012 market close

US Airways Group (LCC) September 13 call

Strike13
Exp MonthSeptember
Stock Price$11.29
Call Bid$0.16
Days to Expiration54
OTM15.15%
Call Yield0.97%
Annualized Call Yield6.59%
Annual Dividend Yield0.00%
Total Annual Yield6.59%

Delta Air Lines (NYSE:DAL) September 11 call

Strike11
Exp MonthSeptember
Stock Price$9.47
Call Bid$0.18
Days to Expiration54
OTM16.16%
Call Yield1.37%
Annualized Call Yield9.28%
Annual Dividend Yield0.00%
Total Annual Yield9.28%

Source: 2 Airline Covered Call Plays