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Covered Calls: Top Major Financials 2012

|About: JPMorgan Chase & Co. (JPM), Includes: AXP, C, GS, WFC

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 January 3, 2013 market close

Summary on selection:

My last two articles were on the biggest gainers in the S&P 500 and DJIA for 2012, both received quality feedback. I've decided to write one last "gainers" article, after watching the Financials ride a bull wave last year its time to play it safe again. All of these companies had massive years after being beaten up multiple times since 2008. Specifically, I chose these because they are very liquid and if you are a long-term investor these most likely make up your financial sector holdings. In particular, JP Morgan was knocked down during the London Whale scandal, but subsequently surged higher off of strong fundamental value buying. These high gaining stocks paired with the call strategy can produce sustainable income on a portfolio that may be over-extended in the short run. The first half of 2013 will most likely be filled with market consolidation and possible weakness; this is a great time to write calls on stocks which have had massive runs.

Year 2012 Performances (12/30/11 close to 12/31/12 close):

GS: 41.06%

JPM: 32.24%

AXP: 21.86%

WFC: 24.02%

C: 18.73%

This sector has tended to take the brunt of political heat recently and should continue to do so in the future. So while the market is paying heavy attention to Washington you should be paying attention to protecting your portfolio. There are a lot of reasons to beleive this high performance won't be matched in 2013. The pace of these gains is logically unsustainable, and if it does continue then a very obvious bubble is forming again. Take the chance during the first few months of 2013 to create some income and lower the risk profile of your portfolio (and pat yourself on the back if you had to the cojones to stick with these).

The contracts picked below fit the criteria above very well. If you feel the strike is too close to the underlying, move up to the next level to give your stock some room to run.

I particularly like to utilize the covered call strategy on stocks that have had big run-ups and then slowed down in the face of immediate future volatility (fiscal cliff). The tried and true advice of "stick to the basics" is more and more relevant in today's turbulent markets. As always I'm not recommending equity buys and sells, I'm spotlighting calls to help generate income.

Goldman Sachs (GS) February 140 call

Ticker GS
Strike 140
Exp Month February
Stock Price $130.90
Call Bid $1.35
Days to Expiration 44
OTM 6.95%
Call Yield 0.99%
Annualized Call Yield 8.24%
Annual Dividend Yield 1.50%
Total Annual Yield 9.74%

JP Morgan (JPM) February 47 call

Ticker JPM
Strike 47
Exp Month February
Stock Price $44.57
Call Bid $0.47
Days to Expiration 44
OTM 5.45%
Call Yield 0.94%
Annualized Call Yield 7.82%
Annual Dividend Yield 2.60%
Total Annual Yield 10.42%

American Express (AXP) April 62.5 call

Ticker AXP
Strike 62.5
Exp Month April
Stock Price $59.00
Call Bid $1.03
Days to Expiration 107
OTM 5.93%
Call Yield 1.66%
Annualized Call Yield 5.67%
Annual Dividend Yield 1.30%
Total Annual Yield 6.97%

Wells Fargo (WFC) April 37 call

Ticker WFC
Strike 37
Exp Month April
Stock Price $34.80
Call Bid $0.60
Days to Expiration 107
OTM 6.32%
Call Yield 1.58%
Annualized Call Yield 5.39%
Annual Dividend Yield 2.50%
Total Annual Yield 7.89%

Citigroup (C) February 44 call

Ticker C
Strike 44
Exp Month February
Stock Price $41.40
Call Bid $0.58
Days to Expiration 44
OTM 6.28%
Call Yield 1.28%
Annualized Call Yield 10.62%
Annual Dividend Yield 0.00%
Total Annual Yield 10.62%

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.