- Sell calls when the market indices, and your stock, are relatively high.
Look for situations where the headline stock indices (Dow and S&P) have risen 10% or more in the last 13 weeks, and where your stock is trading near a 13-week high.
- Write options with expiration dates within the next four to eight weeks.
The time decay of an option accelerates sharply during the last few weeks of the option’s life. You want the hourglass to run out soon.
Among the stocks I’m following, several may offer call-writing opportunities in the next few weeks. Keep an eye on Abbott Laboratories (NYSE:ABT), ConAgra (NYSE:CAG), Kimberly-Clark (NYSE:KMB), McDonald’s (NYSE:MCD), Microsoft (NASDAQ:MSFT) and Raytheon (NYSE:RTN).
Let a Fund Do It
Persistent, skillful call writers can significantly boost their portfolio profits. (In the example I cited earlier, you could theoretically earn about 20% a year on your “XYZ” stake if you wrote a call every three months that expired worthless.) Like most trading techniques, though, call writing requires a lot of attention to the market’s daily — and even hourly — squiggles.
For most amateurs, a better alternative might be to invest in a fund that systematically writes calls against the stocks in its portfolio. A number of closed-end funds have successfully mined this specialized niche, but my top pick is Eaton Vance Tax-Managed Buy-Write Opportunities Fund (NYSE:ETV).
With dividends reinvested at net asset value, ETV has chalked up a compound annual return of about 17% over the past three years, versus about 14% for the S&P.
Like many closed-end funds, ETV adheres to a “managed” distribution policy, which means the fund pays the same cash dividend each quarter regardless of actual earnings. Thus, you shouldn’t take ETV’s current 10.5% yield literally. Barring a market moonshot in 2012, at least part of your payout will constitute a tax-free return of capital (i.e., a return of your original investment).
What counts is the sum of dividends and price change — and on that score, ETV has been a winner since inception in 2005.