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
| Ticker | PSX |
| Strike | 50 |
| Exp Month | November |
| Stock Price | $46.14 |
| Call Bid | $1.10 |
| Days to Expiration | 61 |
| OTM | 8.37% |
| Call Yield | 2.28% |
| Annualized Call Yield | 13.62% |
| Annual Dividend Yield | 1.73% |
| Total Annual Yield | 15.35% |
Hess (HES) October 60 call
| Ticker | HES |
| Strike | 60 |
| Exp Month | October |
| Stock Price | $55.48 |
| Call Bid | $0.56 |
| Days to Expiration | 33 |
| OTM | 8.15% |
| Call Yield | 0.92% |
| Annualized Call Yield | 10.17% |
| Annual Dividend Yield | 0.72% |
| Total Annual Yield | 10.89% |
Valero (VLO) December 35 call
| Ticker | VLO |
| Strike | 35 |
| Exp Month | December |
| Stock Price | $32.03 |
| Call Bid | $1.06 |
| Days to Expiration | 96 |
| OTM | 9.27% |
| Call Yield | 3.15% |
| Annualized Call Yield | 11.99% |
| Annual Dividend Yield | 2.18% |
| Total Annual Yield | 14.17% |
Occidental (OXY) November 97.5 call
| Ticker | OXY |
| Strike | 97.5 |
| Exp Month | November |
| Stock Price | $90.05 |
| Call Bid | $1.08 |
| Days to Expiration | 61 |
| OTM | 8.27% |
| Call Yield | 1.14% |
| Annualized Call Yield | 6.84% |
| Annual Dividend Yield | 2.40% |
| Total Annual Yield | 9.24% |
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
