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

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 |  Includes: DHI, HD, LEN, MDC, TOL
by: Covered Call Strategies

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

Ticker DHI
Strike 23
Exp Month November
Stock Price $21.35
Call Bid $0.62
Days to Expiration 60
OTM 7.73%
Call Yield 2.67%
Annualized Call Yield 16.24%
Annual Dividend Yield 0.70%
Total Annual Yield 16.94%
Click to enlarge

Lennar Corporation (LEN) October 38 call

Ticker LEN
Strike 38
Exp Month October
Stock Price $35.58
Call Bid $0.76
Days to Expiration 32
OTM 6.80%
Call Yield 2.00%
Annualized Call Yield 22.76%
Annual Dividend Yield 0.45%
Total Annual Yield 23.21%
Click to enlarge

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.

Ticker HD
Strike 62.5
Exp Month November
Stock Price $58.83
Call Bid $0.42
Days to Expiration 60
OTM 6.24%
Call Yield 0.63%
Annualized Call Yield 3.83%
Annual Dividend Yield 1.97%
Total Annual Yield 5.80%
Click to enlarge

Toll Brothers Inc. (TOL) December 38 call

Ticker TOL
Strike 38
Exp Month December
Stock Price $35.21
Call Bid $1.30
Days to Expiration 95
OTM 7.92%
Call Yield 3.55%
Annualized Call Yield 13.64%
Annual Dividend Yield 0.00%
Total Annual Yield 13.64%
Click to enlarge

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

Ticker MDC
Strike 41
Exp Month December
Stock Price $37.70
Call Bid $1.25
Days to Expiration 95
OTM 8.75%
Call Yield 3.18%
Annualized Call Yield 12.23%
Annual Dividend Yield 2.35%
Total Annual Yield 14.58%
Click to enlarge

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.