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 take 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 December 11, 2012 market close

Summary on selection:

If you're a tech sector investor, recent volatility has helped by inflating premiums of calls, which we will use to generate income. The NASDAQ has been the leading index, and looks poised for a recovery into the new year. I've chosen a few companies that displayed gains Tuesday. MSFT was up 1.41%, NFLX was up 1.51%, QCOM was up .66%, and IBM was up 0.82%.

The Netflix contract is my personal favorite below. Tons of premium in the call, which enables us to write further out-of-the-money, over 13%. If you think NFLX will stay below $97.50 per share until after January 19th, then consider taking this trade.

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 the fiscal cliff 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.

IBM (NYSE:IBM) April 205 call

Not quite as far OTM as I like, but this is a slower moving stock, so it's worth a look.

Ticker IBM
Strike 205
Exp Month April
Stock Price $194.27
Call Bid $3.15
Days to Expiration 130
OTM 5.52%
Call Yield 1.60%
Annualized Call Yield 4.48%
Annual Dividend Yield 1.75%
Total Annual Yield 6.23%

Qualcomm (NASDAQ:QCOM) January 67.50 call

Ticker QCOM
Strike 67.5
Exp Month January
Stock Price $64.35
Call Bid $0.50
Days to Expiration 39
OTM 4.90%
Call Yield 0.70%
Annualized Call Yield 6.54%
Annual Dividend Yield 1.55%
Total Annual Yield 8.09%

Netflix (NASDAQ:NFLX) January 97.5 call

Ticker NFLX
Strike 97.5
Exp Month January
Stock Price $86.02
Call Bid $2.28
Days to Expiration 39
OTM 13.35%
Call Yield 2.59%
Annualized Call Yield 24.26%
Annual Dividend Yield 0.00%
Total Annual Yield 24.26%

Microsoft (NASDAQ:MSFT) February 29 call

Ticker MSFT
Strike 29
Exp Month February
Stock Price $27.32
Call Bid $0.40
Days to Expiration 67
OTM 6.15%
Call Yield 1.28%
Annualized Call Yield 6.98%
Annual Dividend Yield 3.36%
Total Annual Yield 10.34%

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.