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
| Strike | 82.5 |
| Exp Month | October |
| Stock Price | $77.97 |
| Call Bid | $2.25 |
| Days to Expiration | 53 |
| OTM | 5.81% |
| Call Yield | 2.82% |
| Annualized Call Yield | 19.43% |
| Annual Dividend Yield | 0.00% |
| Total Annual Yield | 19.43% |
Symatec Corp (SYMC) October 19 call
| Strike | 19 |
| Exp Month | October |
| Stock Price | $17.83 |
| Call Bid | $0.37 |
| Days to Expiration | 53 |
| OTM | 6.56% |
| Call Yield | 1.79% |
| Annualized Call Yield | 12.36% |
| Annual Dividend Yield | 0.00% |
| Total Annual Yield | 12.36% |
Red Hat (RHT) October 62.5 call
| Strike | 62.5 |
| Exp Month | October |
| Stock Price | $57.05 |
| Call Bid | $1.45 |
| Days to Expiration | 53 |
| OTM | 9.55% |
| Call Yield | 2.45% |
| Annualized Call Yield | 16.90% |
| Annual Dividend Yield | 0.00% |
| Total Annual Yield | 16.90% |
Adobe (ADBE) October 34 call
| Strike | 34 |
| Exp Month | October |
| Stock Price | $31.96 |
| Call Bid | $0.73 |
| Days to Expiration | 53 |
| OTM | 6.38% |
| Call Yield | 2.13% |
| Annualized Call Yield | 14.65% |
| Annual Dividend Yield | 0.00% |
| Total Annual Yield | 14.65% |
Apple (AAPL) October 725 call
| Strike | 725 |
| Exp Month | October |
| Stock Price | $673.63 |
| Call Bid | $9.35 |
| Days to Expiration | 53 |
| OTM | 7.63% |
| Call Yield | 1.38% |
| Annualized Call Yield | 9.51% |
| Annual Dividend Yield | 1.57% |
| Total Annual Yield | 11.08% |
