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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 14, 2012 market close

Summary on selection:

The financial sector is highlighted in this article mainly due to their involvement with QEinfinity and because they are present in most long-term portfolios. I personally like MasterCard (MA) and Visa (V) a lot but don't recommend buying into any of the other stocks listed below. In addition, the MA and V options don't match perfectly with the guidelines above but are worth pointing out for anyone who is holding those stocks. As always, these articles are focused on income generation from option selling, not stock calls.

Deutche Bank (DB) October 47.5 call

TickerDB
Strike47.5
Exp MonthOctober
Stock Price$44.28
Call Bid$1.00
Days to Expiration34
OTM7.27%
Call Yield2.15%
Annualized Call Yield23.03%
Annual Dividend Yield2.08%
Total Annual Yield25.11%

Mastercard (MA) October 185 call

TickerMA
Strike485
Exp MonthOctober
Stock Price$453.72
Call Bid$1.95
Days to Expiration34
OTM6.89%
Call Yield0.42%
Annualized Call Yield4.50%
Annual Dividend Yield0.26%
Total Annual Yield4.76%

Visa (V) December 145 call

TickerV
Strike145
Exp MonthDecember
Stock Price$134.26
Call Bid$1.97
Days to Expiration97
OTM8.00%
Call Yield1.43%
Annualized Call Yield5.38%
Annual Dividend Yield0.66%
Total Annual Yield6.04%

Goldman Sachs (GS) October 130 call

TickerGS
Strike130
Exp MonthOctober
Stock Price$121.03
Call Bid$0.94
Days to Expiration34
OTM7.41%
Call Yield0.74%
Annualized Call Yield7.89%
Annual Dividend Yield1.52%
Total Annual Yield9.41%

JP Morgan (JPM) November 45 call

TickerJPM
Strike45
Exp MonthNovember
Stock Price$41.55
Call Bid$0.42
Days to Expiration62
OTM8.30%
Call Yield0.89%
Annualized Call Yield5.24%
Annual Dividend Yield2.88%
Total Annual Yield8.12%

Source: 5 Financial Covered Calls: Deutsche Bank, MasterCard, Visa, Goldman Sachs, JPMorgan