4 Energy Covered Calls: PSX, HES, VLO, OXY

Includes: HES, OXY, PSX, VLO
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 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 September 17, 2012 market close

Summary on selection:

After the sudden drop in crude prices Monday at 2pm, I felt it pertinent to write an energy company focused article. Monday was a great example of why using call writing to generate income is great, it reduces the impact of sudden drops and lightens the risk of long-term holdings by providing an added revenue stream to your portfolio. As always, these articles are focused on call selection, I'm not recommending buys or sells of any underlying stocks.

Phillips 66 (PSX) November 50 call

Ticker PSX
Strike 50
Exp Month November
Stock Price $46.14
Call Bid $1.10
Days to Expiration 61
OTM 8.37%
Call Yield 2.28%
Annualized Call Yield 13.62%
Annual Dividend Yield 1.73%
Total Annual Yield 15.35%

Hess (HES) October 60 call

Ticker HES
Strike 60
Exp Month October
Stock Price $55.48
Call Bid $0.56
Days to Expiration 33
OTM 8.15%
Call Yield 0.92%
Annualized Call Yield 10.17%
Annual Dividend Yield 0.72%
Total Annual Yield 10.89%

Valero (VLO) December 35 call

Ticker VLO
Strike 35
Exp Month December
Stock Price $32.03
Call Bid $1.06
Days to Expiration 96
OTM 9.27%
Call Yield 3.15%
Annualized Call Yield 11.99%
Annual Dividend Yield 2.18%
Total Annual Yield 14.17%

Occidental (OXY) November 97.5 call

Ticker OXY
Strike 97.5
Exp Month November
Stock Price $90.05
Call Bid $1.08
Days to Expiration 61
OTM 8.27%
Call Yield 1.14%
Annualized Call Yield 6.84%
Annual Dividend Yield 2.40%
Total Annual Yield 9.24%

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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