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 4 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 4, 2012 market close
Summary on selection:
Although I don't believe it is a good time to buy stock, the
agriculture sector is typically represented in most long-term oriented
portfolios and this is why it has been chosen for this article. These options
may match up nicely if you would like to generate extra income on solid
agricultural stocks. Additional income should be sought specifically while the
financial markets are still murky with the Euro crisis and impending US
political issues.
Joy Global Inc. (JOY)
October 57.5 call
Ticker
|
JOY
|
Strike
|
57.5
|
Exp Month
|
October
|
Stock Price
|
$51.65
|
Call Bid
|
$1.15
|
Days to Expiration
|
46
|
OTM
|
11.33%
|
Call Yield
|
2.13%
|
Annualized Call Yield
|
16.90%
|
Annual Dividend Yield
|
1.30%
|
Total Annual Yield
|
18.20%
|
CNH Global N.V. (CNH)
October 45 call
Ticker
|
CNH
|
Strike
|
45
|
Exp Month
|
October
|
Stock Price
|
$40.18
|
Call Bid
|
$0.45
|
Days to Expiration
|
46
|
OTM
|
12.00%
|
Call Yield
|
1.00%
|
Annualized Call Yield
|
7.90%
|
Annual Dividend Yield
|
0.00%
|
Total Annual Yield
|
7.90%
|
Deere & Company (DE) October 80 call
Ticker
|
DE
|
Strike
|
80
|
Exp Month
|
October
|
Stock Price
|
$74.12
|
Call Bid
|
$0.45
|
Days to Expiration
|
46
|
OTM
|
7.93%
|
Call Yield
|
0.54%
|
Annualized Call Yield
|
4.28%
|
Annual Dividend Yield
|
2.40%
|
Total Annual Yield
|
6.68%
|
Ingersoll-Rand plc (IR) October 49 call
Ticker
|
IR
|
Strike
|
49
|
Exp Month
|
October
|
Stock Price
|
$45.85
|
Call Bid
|
$0.62
|
Days to Expiration
|
46
|
OTM
|
6.87%
|
Call Yield
|
1.24%
|
Annualized Call Yield
|
9.86%
|
Annual Dividend Yield
|
1.40%
|
Total Annual Yield
|
11.26%
|
Caterpillar Inc. (CAT) October 90 call
Ticker
|
CAT
|
Strike
|
90
|
Exp Month
|
October
|
Stock Price
|
$82.66
|
Call Bid
|
$0.81
|
Days to Expiration
|
46
|
OTM
|
8.88%
|
Call Yield
|
0.92%
|
Annualized Call Yield
|
7.30%
|
Annual Dividend Yield
|
2.52%
|
Total Annual Yield
|
9.82%
|
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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