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.
Calls 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 at 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 October 2, 2012 market close
Summary on selection:
I chose the Energy sector for this article because I think it's important to guard investments right now. The Middle East seems to be moving to the forefront of the headlines lately as traders tire of the same old song and dance from Europe. The price of crude, gasoline and natural gas have fluctuated in recent weeks, signaling the need to protect against sudden moves that could negatively affect energy companies.
Anadarko (APC) November 77.5 call
| Ticker | APC |
| Strike | 77.5 |
| Exp Month | November |
| Stock Price | $70.47 |
| Call Bid | $1.04 |
| Days to Expiration | 46 |
| OTM | 9.98% |
| Call Yield | 1.40% |
| Annualized Call Yield | 11.15% |
| Annual Dividend Yield | 0.50% |
| Total Annual Yield | 11.65% |
Suncor Energy (SU) November 36 call
| Ticker | BP |
| Strike | 36 |
| Exp Month | November |
| Stock Price | $33.44 |
| Call Bid | $0.44 |
| Days to Expiration | 46 |
| OTM | 7.66% |
| Call Yield | 1.17% |
| Annualized Call Yield | 9.25% |
| Annual Dividend Yield | 1.60% |
| Total Annual Yield | 10.85% |
Schlumberger (SLB) November 77.5 call
| Ticker | SLB |
| Strike | 77.5 |
| Exp Month | November |
| Stock Price | $72.26 |
| Call Bid | $0.68 |
| Days to Expiration | 46 |
| OTM | 7.25% |
| Call Yield | 0.87% |
| Annualized Call Yield | 6.92% |
| Annual Dividend Yield | 1.50% |
| Total Annual Yield | 8.42% |
National Oilwell Varco (NOV) November 87.5 call
| Ticker | NOV |
| Strike | 87.5 |
| Exp Month | November |
| Stock Price | $80.73 |
| Call Bid | $0.90 |
| Days to Expiration | 46 |
| OTM | 8.39% |
| Call Yield | 1.05% |
| Annualized Call Yield | 8.35% |
| Annual Dividend Yield | 0.60% |
| Total Annual Yield | 8.95% |
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
