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Covered Call Strategies
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Long term equity investor interested in generating yield from writing calls to aid in overall return.
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  • Covered Call: TIF, FCX, HPQ

    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 4 months. Optimally calls will be written on the same underlying 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, 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/Stock price)/Days to expiration*365

    OTM = Out of the money

    Prices current as of June 27, 2012 market close

    Tiffanys (TIF) September 62.5 call

    Another beat up stock here, if you own it you may want to use call writing to help recover some lost value while waiting for it move higher.

    Strike62.5
    Exp MonthSeptember
    Stock Price$57.43
    Call Bid$1.01
    Days to Expiration55
    OTM8.83%
      
    Call Yield1.67%
    Annualized Call Yield11.09%
    Annual Dividend Yield2.23%
    Total Annual Yield13.32%

    Freeport-McMoran (FCX) September 37 call

    The price action is forming a solid base above the $31 level. This stock may correlate with gold/copper prices so keeping an eye on federal easing announcments and global economic growth is a must in order to judge when to ditch/buy the stock.

    Strike37
    Exp MonthSeptember
    Stock Price$33.47
    Call Bid$0.54
    Days to Expiration55
    OTM10.55%
      
    Call Yield1.46%
    Annualized Call Yield9.72%
    Annual Dividend Yield3.73%
    Total Annual Yield13.45%

    Hewlett-Packard (HPQ) September 21 call

    This stock has been experiencing a downtrend over the last 12 months and is a great candidate to write calls against. The underlying doesn't seem to have any chance of exploding upwards thru the strike and cutting off profits but the company is solid and the stock should be a viable long-term investment.

    Strike21
    Exp MonthSeptember
    Stock Price$18.57
    Call Bid$0.20
    Days to Expiration55
    OTM13.12%
      
    Call Yield0.81%
    Annualized Call Yield5.36%
    Annual Dividend Yield2.84%
    Total Annual Yield8.20%

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Aug 01 9:16 PM | Link | Comment!
  • Athletic Apparel Covered Call: LULU, UA

    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:

    • Generate 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, to avoid being called away and give room for underlying movement.
    • Targeted expirations will be within 4 months. Optimally calls will be written on the same underlying 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 hick-ups that may occur.

    Annualized Call Yield performance can be calculated as such:

    = (Call premium/Stock price)/Days to expiration*365

    Prices current as of June 23, 2012 market close

    Lululemon (LULU) September 67.50 @ 1.65

    Weaker price action here after a massive run-up the last couple years. Possible to use the yield generated here in a stock repair capacity. (click to enlarge)

    Strike67.5
    Exp MonthSeptember
    Stock Price$58.39
    Call Bid$1.65
    Days to Expiration61
    OTM15.60%
      
    Call Yield2.74%
    Annualized Call Yield16.40%
    Annual Dividend Yield0.00%
    Total Annual Yield16.40%

    Under Armor (UA) August 55 @ $0.75

    Has been a solid and growing brand in athletics, picking up market share consistently. The price action is strong remaining above the 200 day MA in an overall uptrend. The strike is above the 52 week high.

    Strike55
    Exp MonthAugust
    Stock Price$48.38
    Call Bid$0.75
    Days to Expiration26
    OTM13.68%
      
    Call Yield1.45%
    Annualized Call Yield20.31%
    Annual Dividend Yield0.00%
    Total Annual Yield

    20.31%

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Jul 25 10:00 PM | Link | Comment!
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