2 Airline Covered Call Plays

Includes: AAL, DAL
by: Covered Call Strategies

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

Strike 13
Exp Month September
Stock Price $11.29
Call Bid $0.16
Days to Expiration 54
OTM 15.15%
Call Yield 0.97%
Annualized Call Yield 6.59%
Annual Dividend Yield 0.00%
Total Annual Yield 6.59%

Delta Air Lines (NYSE:DAL) September 11 call

Strike 11
Exp Month September
Stock Price $9.47
Call Bid $0.18
Days to Expiration 54
OTM 16.16%
Call Yield 1.37%
Annualized Call Yield 9.28%
Annual Dividend Yield 0.00%
Total Annual Yield 9.28%

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

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Tagged: , , Major Airlines, Options
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