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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 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

TickerFCX
Strike39
Exp MonthOctober
Stock Price$36.34
Call Bid$0.58
Days to Expiration44
OTM7.32%
Call Yield1.46%
Annualized Call Yield12.10%
Annual Dividend Yield3.90%
Total Annual Yield16.00%

Baidu, Inc. (BIDU) October 125 call

TickerBIDU
Strike125
Exp MonthOctober
Stock Price$112.74
Call Bid$1.63
Days to Expiration44
OTM10.87%
Call Yield1.40%
Annualized Call Yield11.63%
Annual Dividend Yield0.00%
Total Annual Yield11.63%

Google Inc. (GOOG) October 750 call

TickerGOOG
Strike750
Exp MonthOctober
Stock Price$699.40
Call Bid$7.94
Days to Expiration44
OTM7.23%
Call Yield1.13%
Annualized Call Yield9.36%
Annual Dividend Yield0.00%
Total Annual Yield9.36%

Wells Fargo & Co. (WFC) October 36 call

TickerWFC
Strike36
Exp MonthOctober
Stock Price$34.84
Call Bid$0.54
Days to Expiration44
OTM3.33%
Call Yield1.41%
Annualized Call Yield11.67%
Annual Dividend Yield2.60%
Total Annual Yield14.27%

JPMorgan Chase & Co. (JPM) November 42 call

TickerJPM
Strike42
Exp MonthNovember
Stock Price$38.69
Call Bid$0.48
Days to Expiration72
OTM8.56%
Call Yield1.11%
Annualized Call Yield5.63%
Annual Dividend Yield3.20%
Total Annual Yield8.83%

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