5 Mega Cap Covered Calls: FCX, BIDU, GOOG, WFC, JPM

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 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 6, 2012 market close

Summary on selection:

Mega cap stocks have been chosen for this article because they are found in most long-term investor's portfolios. These companies all have solid fundamentals in there relative industries and are strong components to any portfolio. I don't suggest newly buying into financials right now, however tech and mining are solid plays going into the next 12 months. Keep in mind these articles are not focused on stock recommendations, they are about options that will generate income to aid in performance.

Freeport-McMoRan Copper & Gold Inc. (FCX) October 39 call

Ticker FCX
Strike 39
Exp Month October
Stock Price $36.34
Call Bid $0.58
Days to Expiration 44
OTM 7.32%
Call Yield 1.46%
Annualized Call Yield 12.10%
Annual Dividend Yield 3.90%
Total Annual Yield 16.00%

Baidu, Inc. (BIDU) October 125 call

Ticker BIDU
Strike 125
Exp Month October
Stock Price $112.74
Call Bid $1.63
Days to Expiration 44
OTM 10.87%
Call Yield 1.40%
Annualized Call Yield 11.63%
Annual Dividend Yield 0.00%
Total Annual Yield 11.63%

Google Inc. (GOOG) October 750 call

Ticker GOOG
Strike 750
Exp Month October
Stock Price $699.40
Call Bid $7.94
Days to Expiration 44
OTM 7.23%
Call Yield 1.13%
Annualized Call Yield 9.36%
Annual Dividend Yield 0.00%
Total Annual Yield 9.36%

Wells Fargo & Co. (WFC) October 36 call

Ticker WFC
Strike 36
Exp Month October
Stock Price $34.84
Call Bid $0.54
Days to Expiration 44
OTM 3.33%
Call Yield 1.41%
Annualized Call Yield 11.67%
Annual Dividend Yield 2.60%
Total Annual Yield 14.27%

JPMorgan Chase & Co. (JPM) November 42 call

Ticker JPM
Strike 42
Exp Month November
Stock Price $38.69
Call Bid $0.48
Days to Expiration 72
OTM 8.56%
Call Yield 1.11%
Annualized Call Yield 5.63%
Annual Dividend Yield 3.20%
Total Annual Yield 8.83%

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.

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