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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 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

TickerJOY
Strike57.5
Exp MonthOctober
Stock Price$51.65
Call Bid$1.15
Days to Expiration46
OTM11.33%
Call Yield2.13%
Annualized Call Yield16.90%
Annual Dividend Yield1.30%
Total Annual Yield18.20%

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

TickerCNH
Strike45
Exp MonthOctober
Stock Price$40.18
Call Bid$0.45
Days to Expiration46
OTM12.00%
Call Yield1.00%
Annualized Call Yield7.90%
Annual Dividend Yield0.00%
Total Annual Yield7.90%

Deere & Company (DE) October 80 call

TickerDE
Strike80
Exp MonthOctober
Stock Price$74.12
Call Bid$0.45
Days to Expiration46
OTM7.93%
Call Yield0.54%
Annualized Call Yield4.28%
Annual Dividend Yield2.40%
Total Annual Yield6.68%

Ingersoll-Rand plc (IR) October 49 call

TickerIR
Strike49
Exp MonthOctober
Stock Price$45.85
Call Bid$0.62
Days to Expiration46
OTM6.87%
Call Yield1.24%
Annualized Call Yield9.86%
Annual Dividend Yield1.40%
Total Annual Yield11.26%

Caterpillar Inc. (CAT) October 90 call

TickerCAT
Strike90
Exp MonthOctober
Stock Price$82.66
Call Bid$0.81
Days to Expiration46
OTM8.88%
Call Yield0.92%
Annualized Call Yield7.30%
Annual Dividend Yield2.52%
Total Annual Yield9.82%

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