5 Oil Services Covered Calls

Includes: HAL, PBR, RIG, SDRL, SLB
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 December 19, 2012 market close

Summary on selection:

I decided to focus on Oil Services companies for this article. Typically I target calls on the biggest energy companies, but I thought this would be a nice change of pace. Although these can be a little more volatile, they do provide great premiums and can be valuable to any portfolio. My favorite selection from this list is Seadrill. The dividend is 9+%! Seadrill is the largest offshore service provider in the world and operates practically every where. With such a high dividend in addition to the covered call strategy, any investor should be able to maintain positive returns over the long-run. My only worry is a strong euro that could possibly hurt due translation costs.

Another of my favorite companies is Halliburton. It seems this company has its hands in everything, particularly tied to the US boom in energy harvesting and exportation. Halliburton is run very well and has the political ties to keep contracts flowing. Oil services companies tend to be higher beta, but with the correct self control they can be tamed and played very well.

The uncertainty will be high as long as political conflicts enshroud the energy industry. All of the companies listed below have strong business models and will continue to be strong through the Middle East conflicts (they've all survived multiple instances of similar events), and these companies all also have strong presences in developed world economies, where demand will remain high.

Generating some income is always a plus. These articles are not meant to recommend buys or sells of stocks, only to help target call contracts that can be used to generate extra income.

Schlumberger (SLB) February 77.5 call

Ticker SLB
Strike 77.5
Exp Month February
Stock Price $70.63
Call Bid $0.60
Days to Expiration 59
OTM 9.73%
Call Yield 0.78%
Annualized Call Yield 4.82%
Annual Dividend Yield 1.50%
Total Annual Yield 6.32%

Halliburton (HAL) April 38 call

Ticker HAL
Strike 38
Exp Month April
Stock Price $34.61
Call Bid $1.00
Days to Expiration 122
OTM 9.79%
Call Yield 2.74%
Annualized Call Yield 8.21%
Annual Dividend Yield 1.00%
Total Annual Yield 9.21%

Transocean (RIG) January 49 call

Ticker RIG
Strike 49
Exp Month January
Stock Price $46.41
Call Bid $0.53
Days to Expiration 31
OTM 5.58%
Call Yield 1.03%
Annualized Call Yield 12.18%
Annual Dividend Yield 0.00%
Total Annual Yield 12.18%

Petrobras (PBR) April 21 call

Ticker PBR
Strike 21
Exp Month April
Stock Price $20.16
Call Bid $1.04
Days to Expiration 122
OTM 4.17%
Call Yield 4.91%
Annualized Call Yield 14.69%
Annual Dividend Yield 4.90%
Total Annual Yield 19.59%

Seadrill (SDRL) April 41 call

Ticker SDRL
Strike 41
Exp Month April
Stock Price $37.87
Call Bid $0.60
Days to Expiration 122
OTM 8.27%
Call Yield 1.45%
Annualized Call Yield 4.35%
Annual Dividend Yield 9.37%
Total Annual Yield 13.72%

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.