4 Energy Covered Calls: APC, SU, SLB, NOV

Includes: APC, NOV, SLB, SU
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.

  • 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. 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.