5 Mega Tech Covered Calls

 |  Includes: AAPL, AMZN, GOOG, IBM, QCOM
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 November 8, 2012 market close

Summary on selection:

The post election beating has left many investors wondering what to do. Take profit, ditch losers and build cash, or stay the course. With volatility rising in the tech sector today according to the CBOE's single equity volatility indices, I would choose to write calls and capture some income on beaten down names that are still long-term investments. Below I've targeted viable calls that fit my criteria. They are for some of the massive tech companies that are generally in most investors' portfolios, so this article will hopefully apply to most who read it.

The heavy pullback in AAPL over the last two months has given most holders a bumpy ride on what is supposed to be the strongest stock available. Writing a call on AAPL right now will help to alleviate some of that fall off while you wait for it to resume moving higher. Take a moment to pause, let your fear subside and try to bolster your portfolio by hitting for singles instead of closing your eyes and going for the homerun.

These specific calls were chosen for 2 reasons: income generation and the fact that they will expire in a relatively short period of time. I am particularly interested in using calls with a December expiration to clear my playing field for the new year approaching. As always I'm not recommending any buys or sells, only helping to target viable contracts on commonly long-term investments in order to generate short-term income.

Qualcomm (QCOM) January 65 call

Ticker QCOM
Strike 65
Exp Month January
Stock Price $60.62
Call Bid $0.84
Days to Expiration 72
OTM 7.23%
Call Yield 1.30%
Annualized Call Yield 6.61%
Annual Dividend Yield 1.65%
Total Annual Yield 8.26%
Click to enlarge

IBM (IBM) January 205 call

Ticker IBM
Strike 205
Exp Month January
Stock Price $190.17
Call Bid $1.30
Days to Expiration 72
OTM 7.80%
Call Yield 0.66%
Annualized Call Yield 3.33%
Annual Dividend Yield 1.78%
Total Annual Yield 5.11%
Click to enlarge

Google (GOOG) December 695 call

Ticker GOOG
Strike 695
Exp Month December
Stock Price $652.29
Call Bid $5.70
Days to Expiration 44
OTM 6.55%
Call Yield 0.87%
Annualized Call Yield 7.19%
Annual Dividend Yield 0.00%
Total Annual Yield 7.19%
Click to enlarge

Amazon (AMZN) December 245 call

Ticker AMZN
Strike 245
Exp Month December
Stock Price $227.35
Call Bid $2.88
Days to Expiration 44
OTM 7.76%
Call Yield 1.24%
Annualized Call Yield 10.33%
Annual Dividend Yield 0.00%
Total Annual Yield 10.33%
Click to enlarge

Apple (AAPL) January 575 call

Ticker AAPL
Strike 575
Exp Month January
Stock Price $537.26
Call Bid $16.90
Days to Expiration 72
OTM 7.02%
Call Yield 3.14%
Annualized Call Yield 15.90%
Annual Dividend Yield 1.97%
Total Annual Yield 17.87%
Click to enlarge

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.