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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 four 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 5, 2012 market close

Summary on selection:

The fertilizer industry was selected based on its recent exposure to the Midwest drought. If you own any of these, think about writing calls to bring some income your way. This industry typically is favorable to own in the long run and a once-in-a-generation drought shouldn't deter you from keeping it in your portfolio. These articles are about taking care of current holdings, rather than getting into new positions, I don't recommend buying or selling any of the stocks, only writing these calls.

The Mosaic Company (MOS) October 62.5 call

TickerMOS
Strike62.5
Exp MonthOctober
Stock Price$58.81
Call Bid$1.08
Days to Expiration45
OTM6.27%
Call Yield1.75%
Annualized Call Yield14.21%
Annual Dividend Yield1.70%
Total Annual Yield15.91%

LyondellBasell Industries N.V. (LYB) October 50 call

TickerLYB
Strike50
Exp MonthOctober
Stock Price$46.96
Call Bid$0.45
Days to Expiration45
OTM6.47%
Call Yield0.85%
Annualized Call Yield6.91%
Annual Dividend Yield3.41%
Total Annual Yield10.32%

Monsanto Company (MON) October 95 call

*This pick is slightly weaker than the rest, but is still another option.

TickerMON
Strike95
Exp MonthOctober
Stock Price$87.55
Call Bid$0.59
Days to Expiration45
OTM8.51%
Call Yield0.62%
Annualized Call Yield5.00%
Annual Dividend Yield1.70%
Total Annual Yield6.70%

CF Industries Holdings, Inc. (CF) October 225 call

TickerCF
Strike225
Exp MonthOctober
Stock Price$208.23
Call Bid$3.40
Days to Expiration45
OTM8.05%
Call Yield1.61%
Annualized Call Yield13.05%
Annual Dividend Yield.768%
Total Annual Yield13.55%

Source: 4 Fertilizer Covered Calls: MOS, LYB, MON, CF