5 Hurricane Covered Call Ideas

Includes: FCX, GNRC, HD, HTZ, LOW
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 31, 2012 market close

Summary on selection:

After a break due to the weather the stock market re-opened Wednesday. If you were lucky enough to put your hurricane trades on in time (last week) then you're sitting pretty right now. Undoubtedly some people will have a conflict making money off of the disaster, but here are some call ideas to hedge the more common bets investors have been taking.

I've included two homebuilders based on their inventories and ability to supply the repairs and rebuilding; Home Depot (NYSE:HD) and Lowe's (NYSE:LOW). Due to most of the buildings in NYC being older I've included a copper stock that may see demand increase from storm damage to copper pipes and copper wiring. Generators will be in demand by panicked consumers who are trying to plan ahead for the next one, so Generac (NYSE:GNRC) is included below. Finally, I've chosen to include a car-rental company based on the fact that Sandy disrupted a lot of public transportation systems and flights. As always, these articles are not intended to recommend buys or sells of equities, only to target call contracts that can be used to generate income.

Hertz Global (HTZ) December 15 call

Ticker HTZ
Strike 15
Exp Month December
Stock Price $13.27
Call Bid $0.45
Days to Expiration 52
OTM 13.04%
Call Yield 3.01%
Annualized Call Yield 21.16%
Annual Dividend Yield 0.00%
Total Annual Yield 21.16%

Generac (GNRC) December 35 call

This does not match any of the criteria above. However it provides a great boost in a short time. I have included the annual yield here because this is more of a short term hold opportunity.

Ticker GNRC
Strike 35
Exp Month December
Stock Price $34.00
Call Bid $1.50
Days to Expiration 52
OTM 2.94%
Call Yield 4.26%

Freeport McMoran (FCX) December 42 call

Ticker FCX
Strike 42
Exp Month December
Stock Price $38.88
Call Bid $0.76
Days to Expiration 52
OTM 8.02%
Call Yield 1.83%
Annualized Call Yield 12.82%
Annual Dividend Yield 3.20%
Total Annual Yield 16.02%

Lowe's (LOW) December 35 call

Ticker LOW
Strike 35
Exp Month December
Stock Price $32.38
Call Bid $0.40
Days to Expiration 52
OTM 8.09%
Call Yield 1.08%
Annualized Call Yield 7.59%
Annual Dividend Yield 2.00%
Total Annual Yield 9.59%

Home Depot (HD) December 65 call

Ticker HD
Strike 65
Exp Month December
Stock Price $61.38
Call Bid $0.60
Days to Expiration 52
OTM 5.90%
Call Yield 0.90%
Annualized Call Yield 6.29%
Annual Dividend Yield 1.90%
Total Annual Yield 8.19%

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.