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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 stock 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 18, 2012 market close

Summary on selection:

I've been seeing a lot of articles written on the Housing sector comeback lately, even the everyday pundits like Jim Cramer are giving it a look now. I've highlighted a few calls for some of the larger housing sector stocks below. If you're holding any of these, writing calls may be a good way to make up for your previous losses and/or generate income in the short-term as the US economy enters murky water over the next several months. As always, these articles are written to target calls for income generation, I'm not recommending buys or sells on any equities.

D. R. Horton Inc. (DHI) November 23 call

TickerDHI
Strike23
Exp MonthNovember
Stock Price$21.35
Call Bid$0.62
Days to Expiration60
OTM7.73%
Call Yield2.67%
Annualized Call Yield16.24%
Annual Dividend Yield0.70%
Total Annual Yield16.94%

Lennar Corporation (LEN) October 38 call

TickerLEN
Strike38
Exp MonthOctober
Stock Price$35.58
Call Bid$0.76
Days to Expiration32
OTM6.80%
Call Yield2.00%
Annualized Call Yield22.76%
Annual Dividend Yield0.45%
Total Annual Yield23.21%

Home Depot, Inc. (HD) November 62.5 call

This selection doesn't match up with most of the guidelines, but a lot of people hold this stock, so I think it is worth looking at.

TickerHD
Strike62.5
Exp MonthNovember
Stock Price$58.83
Call Bid$0.42
Days to Expiration60
OTM6.24%
Call Yield0.63%
Annualized Call Yield3.83%
Annual Dividend Yield1.97%
Total Annual Yield5.80%

Toll Brothers Inc. (TOL) December 38 call

TickerTOL
Strike38
Exp MonthDecember
Stock Price$35.21
Call Bid$1.30
Days to Expiration95
OTM7.92%
Call Yield3.55%
Annualized Call Yield13.64%
Annual Dividend Yield0.00%
Total Annual Yield13.64%

M.D.C. Holdings, Inc. (MDC) December 41 call

TickerMDC
Strike41
Exp MonthDecember
Stock Price$37.70
Call Bid$1.25
Days to Expiration95
OTM8.75%
Call Yield3.18%
Annualized Call Yield12.23%
Annual Dividend Yield2.35%
Total Annual Yield14.58%

Source: 5 Housing-Related Covered Calls: DHI, LEN, HD, TOL, MDC