by Lawrence Meyers | January 26, 2012 8:05 am
February is a great month to look forward to. Not because everybody is holding hands and sending flowers, but because earnings season is mostly out of the way.
That means you can play covered calls with less chance of your plans being disrupted by those pesky earnings announcements and the fast spikes and dips that can take you out of an options position if you’re not keeping a close eye on it.
Without earnings clouding investors’ best judgment, there’s much less chance a company you sold calls against is going to come out with some huge earnings-driven surprise. So, you are better insulated against your stock being called away or, worse, being left holding the bag on some terribly bearish news.
As January draws to a close, this is a great time to hunt for solid mid- to large-cap companies that have enough volatility to earn a good 2%-2.5% for selling February calls. And today, I have four strong candidates for you that are each poised to deliver exactly that.
EBay (NASDAQ:EBAY) reported decent earnings, has a solid balance sheet with a couple of billion dollars in net cash, produces $2 billion in annual free cash flow, and is growing earnings at a 12%-15% clip.
The company isn’t going bankrupt and there’s not likely to be much big news coming out. Buying at today’s price of $31.94, and selling the EBAY Feb 32 Calls for 75 cents yields about a 2.5% return.
Because the options market has graciously provided strike prices at every dollar mark, I’d probably roll over or repeat the same move for March.
Starbucks (NASDAQ:SBUX) is another good fit. Once again, it’s a solid company that is growing at 15% or more, with free cash flow of over a billion bucks, and has a host of new growth initiatives.
Those calling for the company’s demise are off-base. It remains the premier coffee brand on a worldwide basis. Thus, it’s a perfect candidate for buying the stock and selling calls against it.
In the event something happens and the stock falls, I have no problem holding onto that long position, and being invested in the company. So buying at $47.77, and selling the SBUX Feb 48 Calls for $1.19 gives a 3%-plus return.
Here, too, I’d look to repeat the strategy again in March.
That brings us to American Express (NYSE:AXP). For starters, this is a classic example of my favorite type of options play. I like to buy a position, then repeatedly sell calls against half of it in non-earnings months. There just aren’t big surprises with a company like Amex, unless you’re looking at another financial crisis, which should be telegraphed at this point in history. With Amex trading at $50, you can sell the AMEX Feb 50 Calls for $1.15, giving you a total return of more than 3%.
Speaking of financials, I see JPMorgan Chase (NYSE:JPM) as a solid play. There’s a lot of income to be gained from this stock. Not only does it have a generous preferred stock dividend, and a 2.7% common dividend yield, but you can also earn a good return by selling the JPM Feb 38 Calls for 82 cents. At today’s price of $37.60, that’s a 3.2% return.
The advent of tighter-spaced strikes, as little as one dollar, makes writing calls particularly easy these days, and provides a lot more opportunity for income than ever before.
Lawrence Meyers does not presently hold any positions in any securities mentioned.
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