4 Rail/Carrier Covered Calls: CP, JBHT, UNP, NSC

Includes: CP, JBHT, NSC, UNP
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 19, 2012 market close

Summary on selection:

Lately we've seen some big transport/carrier names miss on earnings. I've chosen to feature the transport/carrier sector today because if you're holding these stocks then you probably want to generate some cushion income while high oil prices take their toll on companies with profit sensitivity to energy prices. As always, these articles are written to target specific option contracts for income generation, not to recommend buys and sells of particular equities.

Canadian Pacific (CP) December 55 call

Ticker CP
Strike 90
Exp Month December
Stock Price $85.09
Call Bid $1.45
Days to Expiration 94
OTM 5.77%
Call Yield 1.65%
Annualized Call Yield 6.39%
Annual Dividend Yield 1.68%
Total Annual Yield 8.07%
Click to enlarge

JB HUNT (JBHT) November 55 call

Ticker JBHT
Strike 55
Exp Month November
Stock Price $51.65
Call Bid $0.80
Days to Expiration 59
OTM 6.49%
Call Yield 1.45%
Annualized Call Yield 8.98%
Annual Dividend Yield 1.08%
Total Annual Yield 10.06%
Click to enlarge

Union Pacific (UNP) November 135 call

Ticker UNP
Strike 135
Exp Month November
Stock Price $125.04
Call Bid $0.80
Days to Expiration 59
OTM 7.97%
Call Yield 0.60%
Annualized Call Yield 3.71%
Annual Dividend Yield 1.92%
Total Annual Yield 5.63%
Click to enlarge

Norfold Southern (NSC) December 77.5 call

Ticker NSC
Strike 77.5
Exp Month December
Stock Price $72.69
Call Bid $0.85
Days to Expiration 94
OTM 6.62%
Call Yield 1.10%
Annualized Call Yield 4.27%
Annual Dividend Yield 2.71%
Total Annual Yield 6.98%
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.