by Lawrence Meyers | May 13, 2014 9:32 am
It’s fun to hunt through my favorite stocks, looking for volatility that generates the kind of covered call options premiums that will get me a solid block of income.
Namely, $1,000 in premiums, all using options just a month or so out.
The best part of these covered calls (in my humble opinion) is that I only look at stocks I would buy for the long term, and would be happy to hold even if the options get assigned.
Even if you don’t like these particular trades, always remember that if you’re looking to generate premium via covered calls, you want to target stocks you consider to be “forever holds” — stocks you would hold for 30 years or more. These stocks should be from companies with solid businesses and fundamentals, and that have long-term growth potential. At the same time, these stocks need to experience some volatility.
But if you’d like a few suggestions on making income via covered calls, read on.
Visa (V) is a favorite covered call of mine for many reasons, not the least of which is that V stock has a high underlying price which means a higher absolute premium.
V stock trades at $211.70 as I write. The June 13 $212.50 call is perfectly placed as far as strike and expiration date are concerned, and sells at $3.85. The premium itself, based on the strike, is thus 1.82% for a four-week-plus holding period, or almost 21% annualized.
However, if V stock gets called away, you’ll also collect the 80 cents in capital gains from the purchase price, bringing your total returns to 2.2%, or 25.4% annualized.
Sell just one of these contracts for $385 in income.
IAC/InterActiveCorp (IACI) is Barry Diller’s conglomerate of online businesses — everything from lending to dating sites, including well-known names such as Match and Ask.com. Diller loves to buy businesses that generate huge cash flow, and that’s why I like IACI stock in general.
It’s also a premium choice for covered calls.
IACI stock is at $65, so have a look at the June $65 call, which is selling at $2.47. The 3.8% premium for a five-week-plus holding period is generous when it comes to calls. I’m usually happy if I can get 2.5%. So this covered call returns 36% annualized.
Selling two of them nets another $494. So we’ve collected $879 so far.
Starbucks (SBUX) is a good way to round out these covered calls. I recently moved SBUX stock into my “forever hold” category, as it is so totally wrapped up in the American experience of daily life that it will likely be part of both our culture and those of other countries forever.
The $71.15 price of SBUX is best leveraged using the June $72.50 call, which trades at $1.07. That’s a 1.5% return, or 14% annualized, so it’s a nice conservative bet on a great stock I’m happy to own regardless.
Selling two of these brings in $214 and brings our total covered call collection to $1,093.
As of this writing, Lawrence Meyers was long SBUX. 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 email@example.com and follow his tweets at @ichabodscranium.
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