5 Blue Chip Covered Calls

Includes: CAT, DD, DE, GOOG, IBM
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 8% 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 December 17, 2012 market close

Summary on selection:

High dividend stocks that are also high quality seem to be the only logical investment lately and going into the next couple years. Paired with the covered call strategy, you should be able to generate solid income while being less stressed about the risk involved.

Lower Beta + High Dividend + Additional Call Income = Win.

Central bank easing and political sloth (concerning the Fiscal Cliff) are steering my portfolio to lean towards solid companies with solid dividends (no financials!). IBM, Caterpillar, Deere and DuPont are great additions to any portfolio. Their products have displayed consistent demand through tough economies and should continue to do so, making them viable candidates for long-term investors. With the exception of Google, all of these companies also deliver a strong dividend. The lowest of the group is IBM at 1.8% and highest is DuPont's massive 3.9%, which is still great when paired with the call strategy.

The tried and true advice of "stick to the basics" is more and more relevant in today's turbulent markets. I personally like all of these companies mentioned below for their exposure to either Federal easing opportunities or plain old global economic conditions improving. As always, I'm not recommending equity buys and sells, I'm spotlighting calls to help generate income.

DuPont (DD) April 48 call

Ticker DD
Strike 48
Exp Month April
Stock Price $44.63
Call Bid $0.65
Days to Expiration 124
OTM 7.55%
Call Yield 1.34%
Annualized Call Yield 3.96%
Annual Dividend Yield 3.90%
Total Annual Yield 7.86%

Deere (DE) March 95 call

Ticker DE
Strike 95
Exp Month March
Stock Price $86.37
Call Bid $0.75
Days to Expiration 89
OTM 9.99%
Call Yield 0.81%
Annualized Call Yield 3.32%
Annual Dividend Yield 2.10%
Total Annual Yield 5.42%

Caterpillar (CAT) January 95 call

Ticker CAT
Strike 95
Exp Month January
Stock Price $89.64
Call Bid $0.55
Days to Expiration 33
OTM 5.98%
Call Yield 0.56%
Annualized Call Yield 6.17%
Annual Dividend Yield 2.30%
Total Annual Yield 8.47%

Google (GOOG) January 765 call

Ticker GOOG
Strike 765
Exp Month January
Stock Price $720.78
Call Bid $7.00
Days to Expiration 33
OTM 6.14%
Call Yield 0.96%
Annualized Call Yield 10.67%
Annual Dividend Yield 0.00%
Total Annual Yield 10.67%

IBM (IBM) April 205 call

Ticker IBM
Strike 205
Exp Month April
Stock Price $193.62
Call Bid $3.00
Days to Expiration 124
OTM 5.88%
Call Yield 1.52%
Annualized Call Yield 4.48%
Annual Dividend Yield 1.80%
Total Annual Yield 6.28%

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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