Seeking Alpha

5 Blue Chips That Offer Great Buy-Write Opportunities

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Includes: AAPL, ABBV, AMGN, AVGO, BA
by: Option Generator
Summary

If done consistently and properly, options are wonderful tools to generate reliable monthly income.

No matter what type of investor you are, the following option strategies can be used for various purposes.

In this article, I singled out five names which I believe will generate compelling premiums going forward.

A series of European counterparts is underway.

Article Summary

There's always something special about collecting a reliable monthly income. Many link regular income streams to dividends. Although you might prefer the highest dividend yields you can find, these mouthwatering returns aren't necessarily the ones that provide durable income. Investors looking for that typically sought-after monthly income should definitely watch the option market, as annualized returns of writing call options can beat your dividend yield with ease while mitigating downside risk.

Today, I will have a look at five stocks which I believe are capable of generating nice returns far exceeding those of traditional investing. That's because you can easily purchase shares and immediately write call options against your new position. Not only does this approach provide income and does it lower your average cost per share, but it will also make up for some of the losses on your broker account. The buy-write strategy allows you to buy the shares cheaper and if you are a dividend hunter, choosing a longer expiration date allows you to still clip the coupon. But there's one crystal clear condition for maximizing your income: don't select the highest beta names thinking you get the best deal available. Stocks that are too volatile don't fit into this framework as you want to have some visibility in order to single out well-balanced strike prices. Technical analysis can be very useful to determine clear resistance and support levels.

The best thing about applying the buy-write strategy is that it fits everyone's risk profile and market expectations. If you're bullish, then you should sell out-of-the-money calls. When forecasting a sideways market, I would strongly recommend you to sell at-the-money calls. Lastly, in-the-money calls are a great way to shelter your portfolio from steep downturns as well as to create sufficient income. At first, in-the-money calls might seem to generate poor returns, but after taking into account the wild volatility over the last few months, investors should spend more attention to these options.

So let's move on to the five blue chips that are currently at the top of my wish list and allow me to make additional income.

Note: if there are no dividend payments underway, then I'll normally choose options that expire within one month in order to maximize Time Value returns and to target the best probability.

Idea #1: Amgen

The first stock on my list is Amgen (AMGN), currently trading at an FCF multiple of just 13, and yielding nearly 3%. Amgen's next ex-dividend date is on February 14, and it will release its full-year results in early February, which doesn't cause a problem for the trade I'd like to set up. Looking at Amgen's technicals, its daily chart provides information about which resistance and support levels may be worth looking at.

(Source: Marketscreener software)

As you can see from the chart above, the technicals on Amgen are quite attractive with clear support and resistance levels. The stock has recently hit the MA100, and it's obvious the stock is likely going to struggle with this barrier, making it a significant resistance.

Having used the calls that expire on January 25 and kept the technical conditions in mind, I selected the following contracts:

(Source: Author's work)

My trade setup can be classified into three main scenarios:

  1. If you are (short-term) bullish on Amgen shares, then the out-of-the-money calls with a strike of $205 are a good fit and assuming your shares get called away, this strategy would return a nice 5.64% in less than a month, translating into an annualized return of more than 67.7%. If shares rise above $206.49, then the received option premium doesn't make up for the additional profit on which you missed out.
  2. From a neutral standpoint, I would sell the $195 calls which offer the highest time value return. If shares get called away, this strategy would return 2.46%, translating into a gain of 42% on an annualized basis.
  3. If you like to be a bit cautious, then selecting in-the-money calls which have plenty of downside protection due to their amount of intrinsic value. Assuming Amgen shares trade above $185 at expiration, you would lock in a return of 1.25%. So no matter into which direction the price is heading you still make money, unless shares fall below $182.55. By applying this strategy, you could make a profit of more than 15% on an annualized basis.

Amgen's share price is now standing at the midpoint of the technical range of $178-$208, but looking at the Time Value returns, there seems to be some room for a slight pullback. In today's market environment, I wouldn't mind choosing the in-the-money call as it offers downside risk protection and a nice Time Value return. Another advantage of using options is that it leaves the option open for selecting different strikes so that you can optimize your own strategy. For instance, if you don't want to miss out on a part of the potential share price appreciation, you could write out-of-the-money calls while writing in-the-money calls that allow you to have at least some downside risk protection.

Idea #2

The second stock I have been bullish on for quite some time now is Apple (AAPL), currently trading at an FCF multiple of just 11.6, and yielding nearly 2%.

(Source: Marketscreener software)

Apple shares have been hit hard recently with volumes indicating the massive strength of the decline. From a daily and weekly perspective, shares are currently trading below the MA100 and MA55. Nevertheless, things start to look attractive again with shares rebounding a bit.

Having used the calls that expire on January 25 and kept the technical conditions in mind, I selected the following contracts:

(Source: Author's work)

My trade setup can be classified into three main scenarios:

  1. If you are (short-term) bullish on Apple shares, then the out-of-the-money calls with a strike of $158 are a good fit and assuming your shares get called away, this strategy would return a nice 7.57% in less than a month, translating into an annualized return of more than 90.8%. If shares rise above $159.49 (resistance level), then the received option premium doesn't make up for the additional profit on which you missed out.
  2. From a more neutral standpoint, I would sell calls with a strike price of $152 (equal to the 23.6% Fibonacci level). If shares get called away, this strategy would return 6.08%, translating into a gain of 73% on an annualized basis.
  3. The most conservative approach to play Apple shares is selecting in-the-money calls which have plenty of downside protection due to their amount of intrinsic value. Assuming Apple shares trade above $144 at expiration, you would lock in a return of 1.78%. So no matter into which direction the price is heading you still make money, unless shares fall below $141.36. By applying this strategy, you could make a profit of more than 30.3% on an annualized basis.

Bearing in mind that the market has punished Apple shares lately, I would prefer writing out-of-the-money calls right away, allowing me to get a piece of the pie if the price recovers.

Idea #3

The third stock that offers attractive option trading possibilities is AbbVie (ABBV), currently trading at a cheap FCF multiple of 11.7, and yielding over 4.8%. AbbVie's next ex-dividend date is on January 14, and it will release its full-year results on January 25.

(Source: Marketscreener software)

As you can see from the chart inserted above, the technicals on AbbVie appear to be neutral. The stock has recently hit the upper trend line, but trades in a tight range this year. On the other hand, the rising bottom line where shares have found support recently continues to act as a safety net. Currently, shares are standing at the top of the range indicating a pullback to $83 tends to occur.

Having used the calls that expire on February 15 and kept the technical conditions in mind, I selected the following contracts:

(Source: Author's work, excluding returns of dividend payments)

My trade setup can be classified into three main scenarios:

  1. If you are (short-term) bullish on AbbVie shares, then the out-of-the-money calls with a strike of $92.5 are a good fit and assuming your shares get called away, this strategy would return a nice 6.29%, translating into an annualized return of more than 59%. If shares rise above $ 94.67, then the received option premium doesn't make up for the additional profit on which you missed out.
  2. From a neutral standpoint, I would sell the $90 calls which offer the highest time value. If shares get called away, this strategy would return 4.56%, translating into a gain of 42% on an annualized basis.
  3. The most conservative approach of the buy-write strategy is selecting in-the-money calls which have plenty of downside protection due to their amount of intrinsic value. Assuming AbbVie shares trade above $82.5 at expiration, you lock in a profit of 1.10%. So no matter into which direction the price is heading you still make money, unless shares fall below $81.52. By applying this strategy, you could make a profit of more than 10% on an annualized basis.

I prefer writing in-the-money calls as long as we don't get a breakout through the recent highs.

Idea #4

The fourth stock I am keeping a keen eye on is Broadcom (AVGO), currently trading at a cheap FCF multiple of 12, and yielding over 5.4%.

(Source: Marketscreener software)

As you can see from the chart above, the stock has recently hit the upper trend line. Right now, shares are at the middle of their range and seem to find support near the MA100 and MA55.

Having used the calls that expire on January 25 and kept the technical conditions in mind, I selected the following contracts:

(Source: Author's work)

My trade setup can be classified into three main scenarios:

  1. If you are (short-term) bullish on Broadcom shares, then the out-of-the-money calls with a strike of $247.5 are a good fit and assuming your shares get called away, this strategy would return a nice 7.53%, translating into an annualized return of more than 128%. If shares rise above $ 250.8, then the received option premium doesn't make up for the additional profit on which you missed out.
  2. From a neutral standpoint, I would sell the $232.5 calls which offer the highest time value. If shares get called away, this strategy would return 3.97%, translating into a gain of 67% on an annualized basis.
  3. Cautious investors may prefer selecting in-the-money calls which have plenty of downside protection due to their amount of intrinsic value. Assuming Broadcom shares trade above $222.5 at expiration, you would lock in a profit of 1.92%. So no matter into which direction the price is heading you still make money, unless shares fall below $218.03. By applying this strategy, you could make a profit of more than 32% on an annualized basis.

I prefer writing in-the-money calls as these contracts give me the best risk/reward in terms of downside protection and collected Time Value.

Idea #5

The last name that has the potential to generate compelling option premium returns is Boeing (BA), currently trading at an FCF multiple of 20, and yielding 2.5%.

(Source: Marketscreener software)

As you can see from the chart provided above, Boeing shares have rebounded sharply, however, the downtrend hasn't been broken yet. With that being said, I would likely wait for a better time if shares get stuck near the recent resistance levels of around $333-$334.

Having used the calls that expire on January 25 and kept the technical conditions in mind, I selected the following contracts:

(Source: Author's work)

My trade setup can be classified into three main scenarios:

  1. If you are (short-term) bullish on Boeing shares, then the out-of-the-money calls with a strike of $335.0 are a good fit and assuming your shares get called away, this strategy would return a nice 3.14%, translating into an annualized return of more than 53%. If shares rise above $ 337.35, then the received option premium doesn't make up for the additional profit on which you missed out.
  2. From a neutral standpoint, I would sell the $327.5 calls which offer the highest time value. If shares get called away, this strategy would return 1.66%, translating into a gain of 28% on an annualized basis.
  3. The most conservative approach of the buy-write strategy is selecting in-the-money calls which have plenty of downside protection due to their amount of intrinsic value. Assuming Boeing shares trade above $317.5 at expiration, you would lock in a return of 0.79%. So no matter into which direction the price is heading you still make money, unless shares fall below $314.93. By applying this strategy, you could make a profit of more than 13% on an annualized basis.

Looking at the whole picture, I believe at-the-money calls are an excellent way to trade Boeing shares right now.

Takeaways

All scenarios above have been stated assuming the position will get called away at expiration. The stocks may sell off and may not get called away. Keep in mind when using this strategy that it is essential that broker commissions are low enough to profit from the position. At first, in-the-money calls might seem to generate poor returns, but after taking into account the wild volatility over the last few months, investors should spend more attention to these options. If you want to learn more about my strategies, then go to HERE.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in MY PREFERRED OPTION CONTRACTS MENTIONED IN THIS ARTICLE over 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.