5 Energy Covered Call Plays

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Includes: APC, HES, MPC, OXY, VLO
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.
  • 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 15, 2012 market close

Marathon Petroleum (MPC) October 55 call

Strike 55
Exp Month October
StockPrice $49.68
CallBid $0.55
Days toExpiration 66
OTM %10.71
   
CallYield %1.01
Annualized CallYield %5.57
Annual DividendYield %2.89
Total AnnualYield %8.46
Click to enlarge

Anadarko Petroleum (APC) September 75 call

Strike 75
Exp Month September
StockPrice $69.08
CallBid $0.75
Days toExpiration 38
OTM %8.57
   
CallYield %1.01
Annualized CallYield %9.73
Annual DividendYield %0.52
Total AnnualYield %10.25
Click to enlarge

Hess (HES) November 55 call

Strike 55
Exp Month November
StockPrice $49.23
CallBid $1.05
Days toExpiration 94
OTM %11.72
   
CallYield %2.03
Annualized CallYield %7.89
Annual DividendYield %0.81
Total AnnualYield %8.70
Click to enlarge

Valero (VLO) September 31 call

Strike 31
Exp Month September
StockPrice $28.61
CallBid $0.35
Days toExpiration 38
OTM %8.35
   
CallYield %1.05
Annualized CallYield %10.07
Annual DividendYield %2.44
Total AnnualYield %12.51
Click to enlarge

Occidental (OXY) November 97.5 call

Strike 97.5
Exp Month November
StockPrice $89.00
CallBid $1.37
Days toExpiration 94
OTM %9.55
   
CallYield %1.48
Annualized CallYield %5.76
Annual DividendYield %2.40
Total AnnualYield %8.16
Click to enlarge

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