5 Tech Covered Calls To Consider

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 September 20, 2012 market close

Summary on selection:

Oracle's (NYSE:ORCL) shaky earnings report inspired today's article. I've listed a few options below to help generate some income for long-term tech holders. Keep in mind the premium may have dropped after the implied volume deflated the post-earnings announcement, so the prices will be slightly different. I chose the Tech sector because it tends to be heavily weighted/traded in active investors' portfolios due to its recent performance; definitely a leader. In addition, it will be beneficial to write calls on Friday as expiration is happening on Saturday and there will be some automatic draw downs come Monday. A lot of these stocks are higher beta so the option pricing will be intrinsically higher, however with the possible slow down/stutter to the U.S. economy approaching these calls will hopefully expire worthless (and if they don't then that means your underlying stock is ripping and there's no problem with that). As always, I'm not recommending buys or sells of specific equities, only helping you to target options from which to generate income.

RedHat (RHT) October 62.5 call

Ticker RHT
Strike 62.5
Exp Month October
Stock Price $56.85
Call Bid $1.05
Days to Expiration 30
OTM 9.94%
Call Yield 1.76%
Annualized Call Yield 21.40%
Annual Dividend Yield 0.00%
Total Annual Yield 21.40%

Salesforce.com (CRM) October 165 call

Ticker CRM
Strike 170
Exp Month October
Stock Price $156.08
Call Bid $1.57
Days to Expiration 30
OTM 8.92%
Call Yield 0.97%
Annualized Call Yield 11.85%
Annual Dividend Yield 0.00%
Total Annual Yield 11.85%

VMWare (VMW) October 110 call

Ticker VMW
Strike 110
Exp Month October
Stock Price $99.72
Call Bid $0.65
Days to Expiration 30
OTM 10.31%
Call Yield 0.60%
Annualized Call Yield 7.32%
Annual Dividend Yield 0.00%
Total Annual Yield 7.32%

Apple (AAPL) October 745 call

Ticker AAPL
Strike 745
Exp Month October
Stock Price $698.75
Call Bid $3.80
Days to Expiration 30
OTM 6.62%
Call Yield 0.54%
Annualized Call Yield 6.53%
Annual Dividend Yield 1.50%
Total Annual Yield 8.03%

Oracle December 35 call

Ticker ORCL
Strike 35
Exp Month December
Stock Price $32.28
Call Bid $0.50
Days to Expiration 93
OTM 8.43%
Call Yield 1.39%
Annualized Call Yield 5.47%
Annual Dividend Yield 0.75%
Total Annual Yield 6.22%

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.