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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.

  • 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 October 10, 2012 market close

Summary on selection:

The DJIA took a beating Wednesday, finally giving in to the down pressure felt by the NASDAQ and S&P 500 this week. The price action in the DJIA looks very top heavy and may be forming a double top in the short-term. I have chosen some of the index's components for this article to help alleviate the pain and generate income on slower moving stocks. The lower beta nature of these stocks made it tough to find viable option contracts which fit my guidelines, but the ideas listed below provide great examples and can be used to your advantage.

As always these articles are not about recommending equity buys and sells, I am spot-lighting contracts to help generate income on investments you already have.

Home Depot (HD) January 65 call

TickerHD
Strike65
Exp MonthJanuary
Stock Price$59.74
Call Bid$0.60
Days to Expiration101
OTM8.80%
Call Yield0.92%
Annualized Call Yield3.33%
Annual Dividend Yield1.94%
Total Annual Yield5.27%

DuPont (DD) January 50 call

TickerDD
Strike50
Exp MonthJanuary
Stock Price$49.12
Call Bid$1.41
Days to Expiration101
OTM1.79%
Call Yield2.77%
Annualized Call Yield10.01%
Annual Dividend Yield3.50%
Total Annual Yield13.51%

Deere (DE) December 87.5 call

TickerDE
Strike87.5
Exp MonthDecember
Stock Price$81.19
Call Bid$1.07
Days to Expiration73
OTM7.77%
Call Yield1.26%
Annualized Call Yield6.28%
Annual Dividend Yield2.27%
Total Annual Yield8.55%
Source: 3 Dow Covered Calls: Home Depot, DuPont, Deere