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Long term equity investor interested in generating yield from writing calls to aid in overall return.
  • Athletic Apparel Covered Call: LULU, UA  0 comments
    Jul 25, 2012 10:00 PM | about stocks: UA, LULU

    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)

    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: UA, LULU
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