5 Commodity ETF Covered Calls

Includes: GLD, SLV, UGA, UNG, USO
by: Covered Call Strategies

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 7% out of the money (OTM) to avoid being called away and to give room for underlying movement.

  • Targeted expirations will be within four months. Optimally, calls will be written on the same underlying stock 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 November 13, 2012 market close

Summary on selection:

I tend to utilize a swing trading mentality, taking profit from mid term ups and downs which occur over a few months, rather than years. I've decided to write this article about commodity ETFs which present unique ways to diversify our portfolio and also present swing trading profit potential. I'm not recommending buying or selling any of these at the moment, but I do like the favorable low levels that oil has been slipping to as of late. It's my position that it is only inevitable until oil rises on supply shocks from the Middle East or demand from economic recovery swings. The same reasoning applies to the gasoline fund I've listed below as well. I try to write an update featuring SLV and GLD every couple weeks because there are a huge number of investors holding these as inflation hedges among other reasons. While you are waiting for gold and silver markets to start bulldozing to higher highs, write a call with a close expiration to generate income. Positive carry trades are always ideal and that's what I'm going for with this strategy. I've decided to keep the expirations on these contracts close to December and January in order to give you a chance to close out as early as possible and hopefully re-write the calls. Hope you all can find some use in this commodity fund themed article.

SPDR Gold Trust (GLD) January 178 call

*Be mindful of how close this call is to the underlying price. It is very possible for gold to move up through the strike before expiration, negating any profits.

Ticker GLD
Strike 175
Exp Month January
Stock Price $167.09
Call Bid $1.55
Days to Expiration 67
OTM 4.73%
Call Yield 0.90%
Annualized Call Yield 4.89%
Annual Dividend Yield 0.00%
Total Annual Yield 4.89%

iShares Silver Trust (SLV) January 34 call

Ticker SLV
Strike 34
Exp Month January
Stock Price $31.39
Call Bid $0.47
Days to Expiration 67
OTM 8.31%
Call Yield 1.34%
Annualized Call Yield 7.29%
Annual Dividend Yield 0.00%
Total Annual Yield 7.29%

United States Gasoline Fund (UGA) December 59 call

Ticker UGA
Strike 59
Exp Month December
Stock Price $55.00
Call Bid $0.65
Days to Expiration 39
OTM 7.27%
Call Yield 1.09%
Annualized Call Yield 10.21%
Annual Dividend Yield 0.00%
Total Annual Yield 10.21%

United States Natural Gas Fund (UNG) December 24 call

Ticker UNG
Strike 24
Exp Month December
Stock Price $22.01
Call Bid $0.38
Days to Expiration 39
OTM 9.04%
Call Yield 1.50%
Annualized Call Yield 14.03%
Annual Dividend Yield 0.00%
Total Annual Yield 14.03%

United States Oil Fund (USO) December 33.5 call

Ticker USO
Strike 33.5
Exp Month December
Stock Price $31.42
Call Bid $0.45
Days to Expiration 39
OTM 6.62%
Call Yield 1.27%
Annualized Call Yield 11.91%
Annual Dividend Yield 0.00%
Total Annual Yield 11.91%

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500. Become a contributor »
Tagged: , Options
Problem with this article? Please tell us. Disagree with this article? .