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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 28, 2012 market close

Summary on selection:

The tech sector was chosen for this article because we believe heading into the rest of 2012 it is one of the most promising areas to invest in. Although these are zero dividend the premium within the calls is very high.

Citrix Systems (CTXS) October 82.5 call

Strike82.5
Exp MonthOctober
Stock Price$77.97
Call Bid$2.25
Days to Expiration53
OTM5.81%
Call Yield2.82%
Annualized Call Yield19.43%
Annual Dividend Yield0.00%
Total Annual Yield19.43%

Symatec Corp (SYMC) October 19 call

Strike19
Exp MonthOctober
Stock Price$17.83
Call Bid$0.37
Days to Expiration53
OTM6.56%
Call Yield1.79%
Annualized Call Yield12.36%
Annual Dividend Yield0.00%
Total Annual Yield12.36%

Red Hat (RHT) October 62.5 call

Strike62.5
Exp MonthOctober
Stock Price$57.05
Call Bid$1.45
Days to Expiration53
OTM9.55%
Call Yield2.45%
Annualized Call Yield16.90%
Annual Dividend Yield0.00%
Total Annual Yield16.90%

Adobe (ADBE) October 34 call

Strike34
Exp MonthOctober
Stock Price$31.96
Call Bid$0.73
Days to Expiration53
OTM6.38%
Call Yield2.13%
Annualized Call Yield14.65%
Annual Dividend Yield0.00%
Total Annual Yield14.65%

Apple (AAPL) October 725 call

Strike725
Exp MonthOctober
Stock Price$673.63
Call Bid$9.35
Days to Expiration53
OTM7.63%
Call Yield1.38%
Annualized Call Yield9.51%
Annual Dividend Yield1.57%
Total Annual Yield11.08%
Source: 5 Tech Covered Calls: CTXS, SYMC, RHT, ADBE, AAPL