5 Financial Covered Calls: C, GS, WFC, MS, JPM

Includes: C, GS, JPM, MS, WFC
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 October 15, 2012 market close

Summary on selection:

I've highlighted the financial sector for this article. As we head into earnings season, it is important for those of you still holdings these time bombs to grab a little extra income on the side. Don't be surprised from earnings details shocks on lower trading revenues as desks are being dismantled due to Washington's inability to keep up with them (random shot at policitians there).

Unless you are a better analyst and investor than Warren Buffett, I wouldn't be holding any banks or thinking about buying right now. If you are a long-term investor bent on riding out the turbulence feel free to utilize some of the suggestions below. In contrast, I realize technically the banking sector has been strong in the last 6 months, particularly JPMorgan, but these articles aren't written to discuss investments, rather to highlight a simple strategy to supplement returns.

In a sort of related note, I'd like to add that I'm curious to read Greg Smiths tell-all on life at Goldman Sachs. Hopefully it will be more like "Liar's Poker" rather than a bitter ex-girlfriend's behind-the-back gossip.

Citigroup (C) November 39 call

Ticker C
Strike 40
Exp Month December
Stock Price $36.66
Call Bid $0.65
Days to Expiration 68
OTM 9.11%
Call Yield 1.64%
Annualized Call Yield 8.79%
Annual Dividend Yield 0.10%
Total Annual Yield 8.89%

Goldman Sachs (GS) November 135 call

Ticker GS
Strike 135
Exp Month November
Stock Price $124.50
Call Bid $0.75
Days to Expiration 33
OTM 8.43%
Call Yield 0.56%
Annualized Call Yield 6.22%
Annual Dividend Yield 1.48%
Total Annual Yield 7.70%

Wells Fargo (WFC) January 36 call

Ticker WFC
Strike 36
Exp Month January
Stock Price $33.90
Call Bid $0.63
Days to Expiration 96
OTM 6.19%
Call Yield 1.71%
Annualized Call Yield 6.51%
Annual Dividend Yield 2.60%
Total Annual Yield 9.11%

Morgan Stanley (MS) November 19 call

Ticker MS
Strike 19
Exp Month November
Stock Price $17.74
Call Bid $0.32
Days to Expiration 33
OTM 7.10%
Call Yield 1.52%
Annualized Call Yield 16.83%
Annual Dividend Yield 1.12%
Total Annual Yield 17.95%

JP Morgan (JPM) December 46 call

Ticker JPM
Strike 46
Exp Month December
Stock Price $42.37
Call Bid $0.45
Days to Expiration 68
OTM 8.57%
Call Yield 0.94%
Annualized Call Yield 5.07%
Annual Dividend Yield 2.80%
Total Annual Yield 7.87%

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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