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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 - 0.05 /Stock price)/Days to expiration*365

Prices current as of August 2, 2012 market close

National Oilwell Varco, Inc. (NOV) September 80 call

Strike80
Exp MonthSeptember
Stock Price$72.74
Call Bid$0.83
Days to Expiration51
OTM9.98%
Call Yield1.07%
Annualized Call Yield7.67%
Annual Dividend Yield0.65%
Total Annual Yield8.32%

Valero Energy Corporation (VLO) September 30 call

Strike30
Exp MonthSeptember
Stock Price$27.30
Call Bid$0.44
Days to Expiration51
OTM9.89%
Call Yield1.43%
Annualized Call Yield10.22%
Annual Dividend Yield2.58%
Total Annual Yield12.80%

Schlumberger NV (SLB) September 77.5 call

Strike77.5
Exp MonthSeptember
Stock Price$70.83
Call Bid$0.62
Days to Expiration51
OTM9.42%
Call Yield0.80%
Annualized Call Yield5.76%
Annual Dividend Yield1.53%
Total Annual Yield7.29%

Halliburton Company (HAL) September 35 call

Strike35
Exp MonthSeptember
Stock Price$32.86
Call Bid$0.57
Days to Expiration51
OTM6.51%
Call Yield1.58%
Annualized Call Yield11.33%
Annual Dividend Yield1.08%
Total Annual Yield12.41%

Source: 4 Energy Covered Call Ideas: National Oilwell Varco, Valero, Schlumberger, Halliburton