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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 August 1, 2012 market close

Hewlett-Packard Co. (HPQ) September 19 call

Strike19
Exp MonthSeptember
Stock Price$17.66
Call Bid$0.40
Days to Expiration52
OTM7.59%
Call Yield1.98%
Annualized Call Yield13.91%
Annual Dividend Yield2.89%
Total Annual Yield16.80%

Diebold Inc. (DBD) September 35 call

Strike35
Exp MonthSeptember
Stock Price$32.36
Call Bid$0.45
Days to Expiration52
OTM8.16%
Call Yield1.24%
Annualized Call Yield8.68%
Annual Dividend Yield3.52%
Total Annual Yield12.20%

Oracle Corporation (ORCL) September 33 call

Strike33
Exp MonthSeptember
Stock Price$30.32
Call Bid$0.25
Days to Expiration52
OTM8.84%
Call Yield0.66%
Annualized Call Yield4.63%
Annual Dividend Yield0.79%
Total Annual Yield5.42%

Red Hat (RHT) September 57.5 call

Strike57.5
Exp MonthSeptember
Stock Price$53.01
Call Bid$1.70
Days to Expiration52
OTM8.47%
Call Yield3.11%
Annualized Call Yield21.85%
Annual Dividend Yield0.00%
Total Annual Yield21.85%

Source: 4 Tech Covered Call Ideas: Hewlett-Packard, Diebold, Oracle, Red Hat