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Athletic Apparel Covered Call: LULU, UA

|About:Lululemon Athletica Inc. (LULU) Includes:Under Armour, Inc. (UAA)

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.

Strike 67.5
Exp Month September
Stock Price $58.39
Call Bid $1.65
Days to Expiration 61
OTM 15.60%
   
Call Yield 2.74%
Annualized Call Yield 16.40%
Annual Dividend Yield 0.00%
Total Annual Yield 16.40%

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.

Strike 55
Exp Month August
Stock Price $48.38
Call Bid $0.75
Days to Expiration 26
OTM 13.68%
   
Call Yield 1.45%
Annualized Call Yield 20.31%
Annual Dividend Yield 0.00%
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.

Stocks: UAA, LULU