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 27, 2012 market close
Summary on selection:
I chose all financial sector stocks for this article because the premium is slightly elevated due the Jackson meetings. Also, these selections are owned by typical long-term investors and are great candidates right now if you are in need of extra yield. Personally I don't believe the financial sector is a great investment in the current market environment, but if you're already holding them then here are a few ideas.
Comerica Inc. (CMA) October 32 call
| Strike | 33 |
| Exp Month | October |
| Stock Price | $30.69 |
| Call Bid | $0.35 |
| Days to Expiration | 54 |
| OTM | 7.53% |
| Call Yield | 0.98% |
| Annualized Call Yield | 6.61% |
| Annual Dividend Yield | 1.95% |
| Total Annual Yield | 8.56% |
Deutsche Bank (DB) October 37.5 call
| Strike | 37.5 |
| Exp Month | October |
| Stock Price | $34.60 |
| Call Bid | $1.10 |
| Days to Expiration | 54 |
| OTM | 8.38% |
| Call Yield | 3.03% |
| Annualized Call Yield | 20.51% |
| Annual Dividend Yield | 2.62% |
| Total Annual Yield | 23.13% |
Goldman Sachs (GS) October 115 call
| Strike | 115 |
| Exp Month | October |
| Stock Price | $105.15 |
| Call Bid | $0.95 |
| Days to Expiration | 54 |
| OTM | 9.37% |
| Call Yield | 0.86% |
| Annualized Call Yield | 5.79% |
| Annual Dividend Yield | 1.75% |
| Total Annual Yield | 7.54% |
JPMorgan Chase & Co. (JPM) November 40 call
| Strike | 40 |
| Exp Month | November |
| Stock Price | $37.24 |
| Call Bid | $0.67 |
| Days to Expiration | 82 |
| OTM | 7.41% |
| Call Yield | 1.66% |
| Annualized Call Yield | 7.41% |
| Annual Dividend Yield | 3.22% |
| Total Annual Yield | 10.63% |
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
