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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 15, 2012 market close

Summary on selection:

I've highlighted the financial sector for this article. As we head into earnings season, it is important for those of you still holdings these time bombs to grab a little extra income on the side. Don't be surprised from earnings details shocks on lower trading revenues as desks are being dismantled due to Washington's inability to keep up with them (random shot at policitians there).

Unless you are a better analyst and investor than Warren Buffett, I wouldn't be holding any banks or thinking about buying right now. If you are a long-term investor bent on riding out the turbulence feel free to utilize some of the suggestions below. In contrast, I realize technically the banking sector has been strong in the last 6 months, particularly JPMorgan, but these articles aren't written to discuss investments, rather to highlight a simple strategy to supplement returns.

In a sort of related note, I'd like to add that I'm curious to read Greg Smiths tell-all on life at Goldman Sachs. Hopefully it will be more like "Liar's Poker" rather than a bitter ex-girlfriend's behind-the-back gossip.

Citigroup (C) November 39 call

TickerC
Strike40
Exp MonthDecember
Stock Price$36.66
Call Bid$0.65
Days to Expiration68
OTM9.11%
Call Yield1.64%
Annualized Call Yield8.79%
Annual Dividend Yield0.10%
Total Annual Yield8.89%

Goldman Sachs (GS) November 135 call

TickerGS
Strike135
Exp MonthNovember
Stock Price$124.50
Call Bid$0.75
Days to Expiration33
OTM8.43%
Call Yield0.56%
Annualized Call Yield6.22%
Annual Dividend Yield1.48%
Total Annual Yield7.70%

Wells Fargo (WFC) January 36 call

TickerWFC
Strike36
Exp MonthJanuary
Stock Price$33.90
Call Bid$0.63
Days to Expiration96
OTM6.19%
Call Yield1.71%
Annualized Call Yield6.51%
Annual Dividend Yield2.60%
Total Annual Yield9.11%

Morgan Stanley (MS) November 19 call

TickerMS
Strike19
Exp MonthNovember
Stock Price$17.74
Call Bid$0.32
Days to Expiration33
OTM7.10%
Call Yield1.52%
Annualized Call Yield16.83%
Annual Dividend Yield1.12%
Total Annual Yield17.95%

JP Morgan (JPM) December 46 call

TickerJPM
Strike46
Exp MonthDecember
Stock Price$42.37
Call Bid$0.45
Days to Expiration68
OTM8.57%
Call Yield0.94%
Annualized Call Yield5.07%
Annual Dividend Yield2.80%
Total Annual Yield7.87%
Source: 5 Financial Covered Calls: C, GS, WFC, MS, JPM