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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 (OTM), 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 13, 2012 market close

Rio Tinto (RIO) October 55 call

Strike55
Exp MonthOctober
Stock Price$50.36
Call Bid$0.80
Days to Expiration68
OTM9.21%
Call Yield1.49%
Annualized Call Yield7.99%
Annual Dividend Yield3.26%
Total Annual Yield11.25%

Silver Wheaton (SLW) September 33 call

Strike33
Exp MonthSeptember
Stock Price$30.65
Call Bid$0.51
Days to Expiration40
OTM7.67%
Call Yield1.50%
Annualized Call Yield13.69%
Annual Dividend Yield1.30%
Total Annual Yield14.99%

US Steel (X) September 25 call

Strike25
Exp MonthSeptember
Stock Price$22.86
Call Bid$0.41
Days to Expiration40
OTM9.36%
Call Yield1.57%
Annualized Call Yield14.37%
Annual Dividend Yield0.87%
Total Annual Yield15.24%

Cliffs Natural Resources (CLF) September 47 call

Strike47
Exp MonthSeptember
Stock Price$43.48
Call Bid$0.75
Days to Expiration40
OTM8.10%
Call Yield1.61%
Annualized Call Yield14.69%
Annual Dividend Yield5.77%
Total Annual Yield20.46%

Teck Resources (TCK) September 32 call

Strike32
Exp MonthSeptember
Stock Price$30.20
Call Bid$0.57
Days to Expiration40
OTM5.96%
Call Yield1.72%
Annualized Call Yield15.71%
Annual Dividend Yield2.71%
Total Annual Yield18.42%

Freeport McMoran (FCX) November 39 call

Strike39
Exp MonthNovember
Stock Price$35.48
Call Bid$0.96
Days to Expiration68
OTM9.92%
Call Yield2.56%
Annualized Call Yield13.77%
Annual Dividend Yield3.44%
Total Annual Yield17.21%
Source: 6 Mining Covered Calls: FCX, TCK, CLF, X, SLW, RIO