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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.
  • 3 Restaurant Covered Calls: PZZA, YUM, CMG 0 comments
    Aug 13, 2012 10:33 PM | about stocks: PZZA, YUM, CMG

    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, 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 August 10, 2012 market close

    Papa John's International (PZZA) October 55 call

    Strike55
    Exp MonthOctober
    Stock Price$51.27
    Call Bid$0.80
    Days to Expiration69
    OTM7.28%
      
    Call Yield1.46%
    Annualized Call Yield7.74%
    Annual Dividend Yield0.00%
    Total Annual Yield7.74%

    Yum! Brands Inc (YUM) October 72.5 call

    Strike72.5
    Exp MonthOctober
    Stock Price$66.83
    Call Bid$0.75
    Days to Expiration69
    OTM8.48%
      
    Call Yield1.05%
    Annualized Call Yield5.54%
    Annual Dividend Yield1.71%
    Total Annual Yield7.25%

    Chipotle Mexican Grill (CMG) September 320 call

    Strike320
    Exp MonthSeptember
    Stock Price$295.39
    Call Bid$3.20
    Days to Expiration41
    OTM8.33%
      
    Call Yield1.07%
    Annualized Call Yield9.49%
    Annual Dividend Yield0.00%
    Total Annual Yield9.49%

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

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