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% |
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% |
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% |
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% |
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% |
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
