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 10, 2012 market close
Summary on selection:
I chose commodity ETFs for this article to show a change of pace from the usual stocks. The gold and silver ETFs are solid plays with all of the potential for quantitative easing and recession fears that exist right now. I truly believe both are great additions to any portfolio, and will help grow and preserve your wealth in the coming years.
The oil ETF is a more risky play in my view particularly with WTI at around 95 per barrel. The seemingly looming global depression could push the shares lower very quickly, however any supply disruptions and long-term demand will keep the price of oil elevated and rising. The point of these articles is to target option contracts in order to generate income, not recommend investments - buy and sell the underlying only after you've done your homework.
If you're already a holder of these ETFs, this strategy will be a great way to generate income while you wait for a move higher. In addition, none of these pay a dividend so this is a great way to synthetically create one.
The United States Oil ETF, LP (USO) November 39 call
| Ticker | USO |
| Strike | 39 |
| Exp Month | November |
| Stock Price | $35.83 |
| Call Bid | $0.75 |
| Days to Expiration | 68 |
| OTM | 8.85% |
| Call Yield | 1.95% |
| Annualized Call Yield | 10.49% |
| Annual Dividend Yield | 0.00% |
| Total Annual Yield | 10.49% |
iShares Silver Trust ETF (SLV) October 35 call
| Ticker | SLV |
| Strike | 35 |
| Exp Month | October |
| Stock Price | $32.28 |
| Call Bid | $0.46 |
| Days to Expiration | 40 |
| OTM | 8.43% |
| Call Yield | 1.27% |
| Annualized Call Yield | 11.59% |
| Annual Dividend Yield | 0.00% |
| Total Annual Yield | 11.59% |
SPDR Gold Trust ETF (GLD) November 179 call
| Ticker | GLD |
| Strike | 179 |
| Exp Month | November |
| Stock Price | $167.30 |
| Call Bid | $1.81 |
| Days to Expiration | 68 |
| OTM | 6.99% |
| Call Yield | 1.05% |
| Annualized Call Yield | 5.65% |
| Annual Dividend Yield | 0.00% |
| Total Annual Yield | 5.65% |
