4 Tech Covered Calls

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 20, 2012 market close

Summary on selection:

The Hewlett (NYSE:HPQ) news came as a bit of a shocker on Tuesday. Accounting scandals, especially the type that go long uncovered tend to have more problems as they are investigated; they always seem to be the tip of the iceberg with a Corzine-esque problem lurking. However, if you're a tech sector investor this kind of news can be very beneficial for you. The fear caused by the scandal sent shockwaves through HPQ related companies, inflating premiums of calls which we will use to generate income.

I've chosen a few companies that had nice premium gains Tuesday in the calls, but also displayed strength in a down market signaling the price action may be more healthy than other tech industry choices. AMZN was up 1.77%, BIDU was up 1.76%, GOOG was up .26%, and EBAY was up 0.71%. This gives investors a great signal that they are holding strong stocks against a weaker market; NASDAQ was only up 0.02%.

Lately I've been trying to keep expiration months as early as possible to allow for multiple re-writes and also to help try to manage the complications due to year end approaching. As always, these article are not recommending buys and sells of stocks, I am simply helping target call contracts that will greatly help generate income in a difficult market.

The hypothetical annual return on these is slightly lower than normal because they don't offer dividends, but try to look past that small factor.

Amazon (AMZN) December 250 call

Ticker AMZN
Strike 250
Exp Month December
Stock Price $233.78
Call Bid $1.62
Days to Expiration 32
OTM 6.94%
Call Yield 0.67%
Annualized Call Yield 7.66%
Annual Dividend Yield 0.00%
Total Annual Yield 7.66%

Baidu (BIDU) December 100 call

Ticker BIDU
Strike 100
Exp Month December
Stock Price $94.08
Call Bid $1.60
Days to Expiration 32
OTM 6.29%
Call Yield 1.65%
Annualized Call Yield 18.79%
Annual Dividend Yield 0.00%
Total Annual Yield 18.79%

Google (GOOG) December 715 call

The premium on this is low percentage wise but I chose to include it for those of you selling these uncovered. I also think 0.40% from this one call is decent haul in the long run.

Ticker GOOG
Strike 715
Exp Month December
Stock Price $669.97
Call Bid $2.70
Days to Expiration 32
OTM 6.72%
Call Yield 0.40%
Annualized Call Yield 4.51%
Annual Dividend Yield 0.00%
Total Annual Yield 4.51%

Ebay (EBAY) January 52.5 call

Ticker EBAY
Strike 52.5
Exp Month January
Stock Price $48.26
Call Bid $0.60
Days to Expiration 60
OTM 8.79%
Call Yield 1.14%
Annualized Call Yield 6.93%
Annual Dividend Yield 0.00%
Total Annual Yield 6.93%

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.

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