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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 11, 2012 market close

Summary on selection:

The retail sector has been chosen for this article to show some options outside of the usual tech, energy and financials that I usually write about. Fundamentally these selections are solid, none of them qualify as luxury, but they should all see a kick from the back-to-school shopping and approaching holiday shopping seasons. Keep in mind these articles are written to help generate income from options - not to recommend equity buys and sells. Some these picks will not match up perfectly with all of the guidelines above, but are still viable to generate income.

Columbia Sportswear Company (COLM) October 55 call

TickerCOLM
Strike55
Exp MonthOctober
Stock Price$51.82
Call Bid$0.50
Days to Expiration39
OTM6.14%
Call Yield0.87%
Annualized Call Yield8.13%
Annual Dividend Yield1.69%
Total Annual Yield9.82%

Foot Locker, Inc. (FL) November 39 call

TickerFL
Strike39
Exp MonthNovember
Stock Price$36.50
Call Bid$0.60
Days to Expiration67
OTM6.85%
Call Yield1.51%
Annualized Call Yield8.21%
Annual Dividend Yield1.97%
Total Annual Yield10.18%

Under Armour, Inc. (UA) October 65 call

TickerUA
Strike65
Exp MonthOctober
Stock Price$59.23
Call Bid$0.45
Days to Expiration39
OTM9.74%
Call Yield0.68%
Annualized Call Yield6.32%
Annual Dividend Yield0.00%
Total Annual Yield6.32%

Macy's Inc. (M) November 42 call

TickerM
Strike42
Exp MonthNovember
Stock Price$39.20
Call Bid$0.74
Days to Expiration67
OTM7.14%
Call Yield1.76%
Annualized Call Yield9.59%
Annual Dividend Yield2.03%
Total Annual Yield11.62%

American Eagle Outfitters, Inc. (AEO) November 24 call

TickerAEO
Strike24
Exp MonthNovember
Stock Price$22.69
Call Bid$0.65
Days to Expiration67
OTM5.77%
Call Yield2.64%
Annualized Call Yield14.41%
Annual Dividend Yield1.94%
Total Annual Yield16.35%

Abercrombie & Fitch (ANF) October 39 call

TickerANF
Strike39
Exp MonthOctober
Stock Price$35.96
Call Bid$0.78
Days to Expiration39
OTM8.45%
Call Yield2.03%
Annualized Call Yield19.00%
Annual Dividend Yield1.94%
Total Annual Yield20.94%

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.

Source: 6 Retail Covered Calls: COLM, FL, UA, M, AEO, ANF