by Lawrence Meyers | October 31, 2012 10:40 am
There are a certain group of stocks I consider “Forever Hold” stocks. You can buy these babies and let them ride for 30 or more years because they are intrinsic to our experience as human beings, and have global brand names that will never be undone. You can expect compounded returns over this period on these names that will very likely be stellar, and outpace the market.
However, you can use these same stocks to generate some current income as well, using two option strategies.
Generally speaking, these are stalwarts that historically do not have gigantic moves up or down, except in the case of some extraordinary event. You only expect 8% to 10% annual returns on these stocks anyway, so why not sell some calls against them and try to juice those returns? If you get stopped out, you just buy back in.
After all, these literally are stocks you intend to hold for decades, and it’s highly unlikely you’ll miss a big move. If you do, then having repeated this strategy month after month will likely yield even more of a return that that one big move you missed.
Of course, if the stock isn’t called away, you keep that premium.
My goal with this strategy is to grab a 1% to 1.25% return monthly, so I can see a 12%-15% annualized return. I also suggest only using half your position with this strategy while the other half just sits and appreciates over the years. Here’s a look at a few such plays you can make (with prices as of Wednesday’s open):
Let’s take Exxon Mobil (NYSE:XOM). The stock trades around $90.62. You can sell the November 90 Call for $1.57, and score a 1.08% return over just three weeks, or a 17% annualized return.
With Coca-Cola (NYSE:KO), the stock trades at $37.04. The December 37.50 Call for 61 cents would net you a minimum of 1.7%, and if the stock got called away, that return would go up to 3%.
I also like Philip Morris International (NYSE:PM), which trades at $88.28, and you can sell the November 87.50 Call for $2.09, for a 1.5% return.
There’s also another way to play this game, though.
Maybe you want to start or add to your position. In this case, sell naked puts one month out, collect the premium, and if the stock gets put to you, then you own a stock you wanted anyway. If it stays above that strike price, you can still buy in, or you can repeat the naked put selling.
For instance, you could sell the November 110 Put on Chevron (NYSE:CVX) for $1.88, for a 1.7% return. If the stock gets put to you, you pick up 3.1% return and the stock along with it.
Wal-Mart (NYSE:WMT) also makes for a nice play. With the stock at $75.11, you can sell the November 75 Put for $1.20. That’s a 1.6% return, or about 23.5% annualized.
It’s important to consider these options in a time where bond yields have dried up. By replacing bonds in your portfolio with safe, “forever hold” stocks (especially ones that pay dividends), retirement investors can replace that lost income with these ideas.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.
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