Write Covered Calls For The Holidays

Includes: JNJ, XOM
by: Regarded Solutions

I've written several articles on Retirement Strategies, Dividend Stocks and Hedging Strategies. Just click on each of them for a quick review, or to read them for the very first time if you are new to my articles.

Having a well diversified portfolio of dividend stocks, a saving and spending strategy, and a sound options strategy will offer everyone, especially those who have retired and seek income, an opportunity to have a safer, more secure, overall portfolio that has a good chance of beating the averages.

We are entering the time of year where everyone can use some extra cash for the holiday season and anything else that crops up. By using the strategy of writing covered calls, you can give yourself a "bonus" of sorts based on the premiums given by selling calls against your core portfolio holdings.

Implementing this strategy on a regular basis can give you extra cash whenever you desire it by the way. Monthly, quarterly, semi-annually, etc. etc., however at this time of year it's more like that year-end "bonus" many received from their employers, and its FUN to get.

Taking Action Now

Let's take 2 of my previously suggested ultra blue-chip stocks and see what we can do with them.

  1. Exxon Mobil (NYSE:XOM) $78.09/share and a 2.3% dividend yield
  2. Johnson & Johnson (NYSE:JNJ) $64.39/share and a 3.5% dividend yield

Both of these great companies fit in virtually anyone's portfolio (I own them both myself) and offer almost everything a conservative investor seeking some growth with dividends could ask for.

I have chosen these 2 stocks for the premiums they offer for selling options against them, or writing covered calls.

Let's take a look at the options i have selected for this article:

XOM: January 20th 2012, $85.00 strike price, offers a $.75/share premium

JNJ: January 20th 2012, $67.50 strike price, offers a $.65/share premium

*Please note that I do not personally like going further out in than 3 expiration dates or 90 days.

Let us assume you own 1,000 shares of each, at today's price (or even less if you have owned them for awhile).

By selling 10 contracts of the options I selected, which expire January 20th, 2012, you would "give" yourself an immediate infusion of disposable income in the amount of $1,400.00 less commissions.

A "bonus" if you will, from the premiums you have pocketed by selling or writing covered calls.

Assuming that even if the share price fluctuates somewhat during this time frame of 3 expiration dates, but never goes above the strike price at the time the shares can be called (usually just ON the expiration date at the market closing), you would keep all the shares, collect all the dividends, and you have already pocketed the premiums on the sale of the calls!

In the case of the 2 stocks you own, XOM goes ex-dividend on 11/08/2011, at $.47/share, and JNJ goes ex-dividend on 11/25/2011, at $.57/share.

As long as you own the shares, and there is really no reason for you NOT to, the morning of the ex-dividend date, the dividends are yours even if the options are called prior to their expiring, which is highly unlikely unless as I have mentioned, the price finishes above the strike price already noted.

That's a total of another $1,040.00, no commissions at all.

Are you still with me? I hope so, because now it gets to be even more fun.

There are basically 2 scenarios that can occur.

  1. You keep the shares, the premium, and of course the dividend if the shares are below the strike price at options expiration date 01/20/2012.
  2. You keep the premium, and the dividend, but the shares are called away if the price is above the strike price at options expiration date 01/20/2012.

That's it, those are the 2 scenarios that are most likely to occur, plus you still have 2 choices if scenario 2 happens.

  1. Let the shares get called away, keep all the bonuses and dividends, and re-buy the shares back the very next day the market opens if you wish.
  2. Roll the options over to the next expiration month, at a price above the stock's price that day (only if they are over the strike price), prior to them expiring, which will give you another 30 days or so, a new premium on the calls you've sold with the roll over, and retain all of the shares without them being called on that day.

For those just starting with this strategy, I urge and suggest that you stick with choice number 1. Choice number 2 has a tad more risk, is a bit trickier, but as you get your feet wet will also be a viable strategy in my opinion, but just not right out of the box.

My Opinion

Having purchased these 2 stocks at the noted prices (or already owned them even at lower prices) you have 2 giant blue-chip companies that are solid, pay you fair dividends, and offer very good premiums on the calls for you to sell, that will give your portfolio an enhanced return and extra cash to use as you wish.

Investors can do this process on a regular basis, with any stock owned that offers options, and you will find this strategy to be a slight hedge as well during some rocky times. I use this strategy often, and it works for me.

Disclosure: I am long XOM, JNJ.