With Valentine’s Day just around the corner (and nearly corresponding with the February options expiration), I thought it would be useful to find a few short-term trades to generate enough income to pay for the lavish dinner and gifts we will all be giving our sweeties next week.
In-the-money covered calls are my vehicle of choice. With only 10 trading days until Feb. 18 options expiration, I went to my favorite covered call Web site and created a few filters in the screener:
- Expiration date = Feb. 18
- No earnings before expiration
- In-the-money 5% or more
- No leveraged ETFs
- Open interest > 2,000 contracts
- No health care
- Stock price > $5
- Market cap > $500M
- P/E Ratio < 20
- Annual return if flat > 20%
- Time premium > 34 cents
Most of these filters are self-explanatory. Some are personal judgments. The 5% in-the-money requirement is arbitrary but, for a 10-day income-oriented trade, I want enough downside protection so that I’m likely to be “called” out of my long shares at expiration.
The removal of health care stocks is because the symbols that showed up in this screen are companies I know are volatile. The time premium requirement of 35 cents or more is only for smaller trades so that commissions don’t consume all of the profits. If you’re trading 500 or more shares, you can relax that requirement.
This screen resulted in eight candidate trades for consideration:
|stock||Ticker||Stike PRIce||Call Strike||Net debit||Time premium||Annual Return|
|Research In Motion||RIMM||16.90||16||15.61||0.39||60.8%|
|Freeport-McMoRan Copper & Gold||FCX||46.55||44||43.62||0.38||21.9%|
As with all strategies, you’ll want to stay diversified and use proper position sizing. And do your due diligence before buying. These are not trade recommendations; they are merely the output of a reasonable set of filters applied to the February expiration.
How many shares you buy depends on how big of a splash you plan to make. The average time premium for the above trades is about 43 cents per share. If you are looking to generate $200, then you need $200/$0.43 = 465 shares. We’ll round that up to 500 shares — since option contracts are for 100 shares each and because there will be some transaction costs.
If you are looking to generate $1,500, then you’ll need to buy around 3,500 shares from the above list and write those in-the-money calls.