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 27, 2012 market close
Summary on selection:
Mega cap stocks have been chosen for this article because they are found in most long-term investor's portfolios. These companies all have solid fundamentals in their relative industries and are strong components to any portfolio. I don't suggest newly buying into financials right now, however tech, energy, and mining are solid plays going into the next 12 months. These companies are supposed to be examples of common holdings in the typical long-term investor's portfolio, definitely great candidates for income generation. If you're worried about a near term pullback in the over-extended equity markets, this is a perfect way to gain some peace of mind. Most of these calls are so far out-of-the-money that the market will have to make a major bull run in order for these to expire in the money within the next two months, making them ideal for a call selling strategy. Keep in mind these articles are not focused on stock recommendations, they are about options that will generate income to aid in performance.
Halliburton (HAL) November 37 call
| Ticker | HAL |
| Strike | 37 |
| Exp Month | November |
| Stock Price | $34.22 |
| Call Bid | $0.50 |
| Days to Expiration | 51 |
| OTM | 8.12% |
| Call Yield | 1.32% |
| Annualized Call Yield | 9.41% |
| Annual Dividend Yield | 1.05% |
| Total Annual Yield | 10.46% |
Freeport McMoran (FCX) November 44 call
| Ticker | FCX |
| Strike | 44 |
| Exp Month | November |
| Stock Price | $40.11 |
| Call Bid | $0.59 |
| Days to Expiration | 51 |
| OTM | 9.70% |
| Call Yield | 1.35% |
| Annualized Call Yield | 9.64% |
| Annual Dividend Yield | 3.12% |
| Total Annual Yield | 12.76% |
BP (BP) November 45 call
| Ticker | BP |
| Strike | 45 |
| Exp Month | November |
| Stock Price | $43.04 |
| Call Bid | $0.46 |
| Days to Expiration | 51 |
| OTM | 4.55% |
| Call Yield | 0.95% |
| Annualized Call Yield | 6.82% |
| Annual Dividend Yield | 4.50% |
| Total Annual Yield | 11.32% |
Amazon (AMZN) November 285 call
| Ticker | AMZN |
| Strike | 285 |
| Exp Month | November |
| Stock Price | $256.59 |
| Call Bid | $3.55 |
| Days to Expiration | 51 |
| OTM | 11.07% |
| Call Yield | 1.36% |
| Annualized Call Yield | 9.76% |
| Annual Dividend Yield | 0.00% |
| Total Annual Yield | 9.76% |
JP Morgan Chase (JPM) December 44 call
| Ticker | JPM |
| Strike | 44 |
| Exp Month | December |
| Stock Price | $40.86 |
| Call Bid | $0.54 |
| Days to Expiration | 86 |
| OTM | 7.68% |
| Call Yield | 1.20% |
| Annualized Call Yield | 5.09% |
| Annual Dividend Yield | 2.90% |
| Total Annual Yield | 7.99% |
Google (GOOG) December 820 call
| Ticker | GOOG |
| Strike | 820 |
| Exp Month | December |
| Stock Price | $756.50 |
| Call Bid | $12.90 |
| Days to Expiration | 86 |
| OTM | 8.39% |
| Call Yield | 1.70% |
| Annualized Call Yield | 7.21% |
| Annual Dividend Yield | 0.00% |
| Total Annual Yield | 7.21% |
Apple (AAPL) December 730 call
| Ticker | AAPL |
| Strike | 730 |
| Exp Month | December |
| Stock Price | $681.32 |
| Call Bid | $18.05 |
| Days to Expiration | 86 |
| OTM | 7.14% |
| Call Yield | 2.64% |
| Annualized Call Yield | 11.21% |
| Annual Dividend Yield | 1.50% |
| Total Annual Yield | 12.71% |
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
