by Lawrence Meyers | May 21, 2014 12:54 pm
There’s a group of stocks I refer to as “forever hold” stocks because I believe you can hold them for at least a generation. They are companies that deliver products or services that are fundamental to our very existence, or have so completely taken over a market that only a disaster would dislodge them.
As it would turn out, “forever hold” stocks also are great stocks to sell covered calls against.
You see, you definitely can buy these stocks and just sit on them forever, reinvest the dividends and you’ll do just fine. However, you also can sell covered calls against these stocks, because they rarely move more than 2% to 3% on their best days. Thus, if the stock gets called away, you can buy it back and sell another call.
It’s rare you’ll miss out on too much upside, and the premiums you’ll capture when they aren’t called away will likely make up for it (and more). Plus you can always just sell calls against half your position.
Exxon Mobil (XOM) is one of my favorites in this category. I’ve long talked about Exxon’s place in the world and Wall Street as long as the world needs oil — and that’ll be for some time to come.
Exxon is trading above $101 right now. The June 27 $102 call sells for $1.35. If XOM stock gets called away, you get a 1.34% return for a five-week holding period. That might not sound like much, but it translates to a 13.9% annualized return.
Since Exxon Mobil isn’t expected to report earnings until late June, you could even sell the July $105 call for 71 cents, just to goose the returns a little bit more and capture a large capital gain if called away.
The covered calls here are easy, conservative plays.
Home Depot (HD) might not initially be thought of as a “forever hold” stock, but ask yourself this question: When you think of hardware, what other store comes to mind? Other than Lowe’s (LOW), I bet very few others came to mind. Frankly, both would qualify in my mind as “forever holds.”
Covered calls work very well in both of these cases.
HD stock trades at $78.06. The June 27 $78 calls are selling for $1.34. That’s a 1.7% return in roughly five weeks, or a 17.7% annualized return. LOW stock is trading at $45.17, with the June $45 calls selling for $1.18. That’s a 2.6% return in about four weeks, or a 33.8% return annualized.
Why the difference? Lowe’s is about half the size of Home Depot, and its stock is a bit more volatile. That contributes to a higher premium. I prefer Home Depot because of this.
Then the safest play you could make is with Berkshire Hathaway (BRK.B). The Berkshire B shares are the only way to use options.
Uncle Warren’s stock is trading under $127. This presents a slight problem because it is dead smack in the middle of two wide strike prices. I would select the September $130 call and sell it for $2.42. It’s not a massive premium, but this is the most conservative play for a reason. The 1.9% return is potentially augmented if the stock gets called away by a 2.4% capital gain.
As of this writing, Lawrence Meyers was long BRK.B. He is president of Asymmetrical Media Strategies, a crisis PR firm, and PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets at @ichabodscranium.
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