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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

TickerAPC
Strike77.5
Exp MonthNovember
Stock Price$70.47
Call Bid$1.04
Days to Expiration46
OTM9.98%
Call Yield1.40%
Annualized Call Yield11.15%
Annual Dividend Yield0.50%
Total Annual Yield11.65%

Suncor Energy (SU) November 36 call

TickerBP
Strike36
Exp MonthNovember
Stock Price$33.44
Call Bid$0.44
Days to Expiration46
OTM7.66%
Call Yield1.17%
Annualized Call Yield9.25%
Annual Dividend Yield1.60%
Total Annual Yield10.85%

Schlumberger (SLB) November 77.5 call

TickerSLB
Strike77.5
Exp MonthNovember
Stock Price$72.26
Call Bid$0.68
Days to Expiration46
OTM7.25%
Call Yield0.87%
Annualized Call Yield6.92%
Annual Dividend Yield1.50%
Total Annual Yield8.42%

National Oilwell Varco (NOV) November 87.5 call

TickerNOV
Strike87.5
Exp MonthNovember
Stock Price$80.73
Call Bid$0.90
Days to Expiration46
OTM8.39%
Call Yield1.05%
Annualized Call Yield8.35%
Annual Dividend Yield0.60%
Total Annual Yield8.95%
Source: 4 Energy Covered Calls: APC, SU, SLB, NOV