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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 17, 2012 market close

Summary on selection:

After the sudden drop in crude prices Monday at 2pm, I felt it pertinent to write an energy company focused article. Monday was a great example of why using call writing to generate income is great, it reduces the impact of sudden drops and lightens the risk of long-term holdings by providing an added revenue stream to your portfolio. As always, these articles are focused on call selection, I'm not recommending buys or sells of any underlying stocks.

Phillips 66 (PSX) November 50 call

TickerPSX
Strike50
Exp MonthNovember
Stock Price$46.14
Call Bid$1.10
Days to Expiration61
OTM8.37%
Call Yield2.28%
Annualized Call Yield13.62%
Annual Dividend Yield1.73%
Total Annual Yield15.35%

Hess (HES) October 60 call

TickerHES
Strike60
Exp MonthOctober
Stock Price$55.48
Call Bid$0.56
Days to Expiration33
OTM8.15%
Call Yield0.92%
Annualized Call Yield10.17%
Annual Dividend Yield0.72%
Total Annual Yield10.89%

Valero (VLO) December 35 call

TickerVLO
Strike35
Exp MonthDecember
Stock Price$32.03
Call Bid$1.06
Days to Expiration96
OTM9.27%
Call Yield3.15%
Annualized Call Yield11.99%
Annual Dividend Yield2.18%
Total Annual Yield14.17%

Occidental (OXY) November 97.5 call

TickerOXY
Strike97.5
Exp MonthNovember
Stock Price$90.05
Call Bid$1.08
Days to Expiration61
OTM8.27%
Call Yield1.14%
Annualized Call Yield6.84%
Annual Dividend Yield2.40%
Total Annual Yield9.24%
Source: 4 Energy Covered Calls: PSX, HES, VLO, OXY