5 Agriculture Covered Calls: JOY, CNH, DE, IR, CAT

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 |  Includes: CAT, CNH, DE, IR, JOY
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 September 4, 2012 market close

Summary on selection:

Although I don't believe it is a good time to buy stock, the agriculture sector is typically represented in most long-term oriented portfolios and this is why it has been chosen for this article. These options may match up nicely if you would like to generate extra income on solid agricultural stocks. Additional income should be sought specifically while the financial markets are still murky with the Euro crisis and impending US political issues.

Joy Global Inc. (JOY) October 57.5 call

Ticker JOY
Strike 57.5
Exp Month October
Stock Price $51.65
Call Bid $1.15
Days to Expiration 46
OTM 11.33%
Call Yield 2.13%
Annualized Call Yield 16.90%
Annual Dividend Yield 1.30%
Total Annual Yield 18.20%
Click to enlarge

CNH Global N.V. (CNH) October 45 call

Ticker CNH
Strike 45
Exp Month October
Stock Price $40.18
Call Bid $0.45
Days to Expiration 46
OTM 12.00%
Call Yield 1.00%
Annualized Call Yield 7.90%
Annual Dividend Yield 0.00%
Total Annual Yield 7.90%
Click to enlarge

Deere & Company (DE) October 80 call

Ticker DE
Strike 80
Exp Month October
Stock Price $74.12
Call Bid $0.45
Days to Expiration 46
OTM 7.93%
Call Yield 0.54%
Annualized Call Yield 4.28%
Annual Dividend Yield 2.40%
Total Annual Yield 6.68%
Click to enlarge

Ingersoll-Rand plc (IR) October 49 call

Ticker IR
Strike 49
Exp Month October
Stock Price $45.85
Call Bid $0.62
Days to Expiration 46
OTM 6.87%
Call Yield 1.24%
Annualized Call Yield 9.86%
Annual Dividend Yield 1.40%
Total Annual Yield 11.26%
Click to enlarge

Caterpillar Inc. (CAT) October 90 call

Ticker CAT
Strike 90
Exp Month October
Stock Price $82.66
Call Bid $0.81
Days to Expiration 46
OTM 8.88%
Call Yield 0.92%
Annualized Call Yield 7.30%
Annual Dividend Yield 2.52%
Total Annual Yield 9.82%
Click to enlarge

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.