5 Gold/Silver Covered Calls

Includes: ABX, AUY, GDX, GLD, SLW
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.

  • 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 11, 2012 market close

Summary on selection:

I've chosen a few gold and silver related stocks for this article. I believe a lot of investors and market-watchers are involved with these and think it is a good point in time to generate income while waiting for them to hopefully explode higher on inflation and instability fears. After the Fed initiated QE-infinity (or whatever you are calling it) these type of stocks should be more than just a thought in your portfolio. Some of the major hedge fund players such as John Paulson and the great macro mind Ray Dalio have publicly endorsed gold and hold it in their portfolios. As always, I'm recommending any buys or sells of particular equities, simply helping you to target call contracts to assist in income generation.

Yamana Gold (AUY) January 21 call

Ticker AUY
Strike 21
Exp Month January
Stock Price $19.16
Call Bid $0.71
Days to Expiration 100
OTM 9.60%
Call Yield 3.44%
Annualized Call Yield 12.57%
Annual Dividend Yield 1.36%
Total Annual Yield 13.93%

Silver Wheaton (SLW) November 43 call

Ticker SLW
Strike 43
Exp Month November
Stock Price $39.30
Call Bid $0.67
Days to Expiration 37
OTM 9.41%
Call Yield 1.58%
Annualized Call Yield 15.56%
Annual Dividend Yield 1.00%
Total Annual Yield 16.56%

SPDR Gold ETF (GLD) December 184 call

Ticker GLD
Strike 184
Exp Month December
Stock Price $171.30
Call Bid $1.07
Days to Expiration 72
OTM 7.41%
Call Yield 0.60%
Annualized Call Yield 3.02%
Annual Dividend Yield 0.00%
Total Annual Yield 3.02%

Barrick Gold (ABX) November 43 call

Ticker ABX
Strike 43
Exp Month November
Stock Price $39.88
Call Bid $0.51
Days to Expiration 37
OTM 7.82%
Call Yield 1.15%
Annualized Call Yield 11.38%
Annual Dividend Yield 2.00%
Total Annual Yield 13.38%

Market Vectors Gold Miners ETF (GDX) November 56.5 call

Ticker GDX
Strike 56.5
Exp Month November
Stock Price $52.52
Call Bid $0.64
Days to Expiration 37
OTM 7.58%
Call Yield 1.12%
Annualized Call Yield 11.08%
Annual Dividend Yield 0.28%
Total Annual Yield 11.36%

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.