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Long term equity investor interested in generating yield from writing calls to aid in overall return.
  • Covered Call: TIF, FCX, HPQ  0 comments
    Aug 1, 2012 9:16 PM | about stocks: HPQ, TIF, FCX

    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.

    Strike 62.5
    Exp Month September
    Stock Price $57.43
    Call Bid $1.01
    Days to Expiration 55
    OTM 8.83%
       
    Call Yield 1.67%
    Annualized Call Yield 11.09%
    Annual Dividend Yield 2.23%
    Total Annual Yield 13.32%

    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.

    Strike 37
    Exp Month September
    Stock Price $33.47
    Call Bid $0.54
    Days to Expiration 55
    OTM 10.55%
       
    Call Yield 1.46%
    Annualized Call Yield 9.72%
    Annual Dividend Yield 3.73%
    Total Annual Yield 13.45%

    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.

    Strike 21
    Exp Month September
    Stock Price $18.57
    Call Bid $0.20
    Days to Expiration 55
    OTM 13.12%
       
    Call Yield 0.81%
    Annualized Call Yield 5.36%
    Annual Dividend Yield 2.84%
    Total Annual Yield 8.20%

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

    Stocks: HPQ, TIF, FCX
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