3 Covered Calls for Slam-Dunk Income

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Options can cut both ways. If you don’t know what you’re doing, you can get destroyed and lose a lot of money.

dividend stocksCovered calls, for example, got me in big trouble back in 2000 when I wasn’t really using them the right way. I purchased a high-flying Internet stock for $143 per share, just so I could sell the covered call for $20 and earn $2,000 lickety-split.

I was enticed by that insane premium, which was normal at the time. Volatility creates high premiums, and Internet stocks were moving in double digits on a daily basis. Well, that company promptly tanked. Rather than eat the $2,000 loss I had by expiration (as the stock had fallen 40 points), I held it all the way down to $1.40. Trust me, the capital loss that would offset other gains for tax purposes was still a bitter pill.

Today, I will only sell covered calls against certain stocks.

In today’s case, I’m going after stocks that I believe are undervalued. You can buy the underlying stock, then sell the calls. You earn the premium, so if the stock doesn’t get called away, you make extra money. If it does, you can always buy back in at any time.

Covered Calls on Conn’s (CONN)

Covered Calls on Conn's (CONN)Conn’s (CONN) is a regional rent-to-own operator. I know rent-to-own stocks very well and know how these businesses operate. CONN stock is carving out its own niche, as it handles mattresses and furniture, which most RTO companies do not deal in. I think the stock is undervalued here at $42.38.

I had shares put to me a few days after selling Aug $45 naked puts last month for $3.22. I’ve now sold the Sep $45 calls for $2.05. If the stock gets called away, my total take will be $5.27. However, just the covered call portion alone nets me 4.8%, which is twice what I would hope to get in a covered call.

Covered Calls on Starbucks (SBUX)

Covered Calls on Starbucks (SBUX)Reasonable minds can differ as to whether Starbucks (SBUX) is a value stock, growth stock or both. I consider it both because I think it is undervalued.

If you purchase SBUX today at $77.63, you might consider selling the Oct $77.50 calls for $2. Starbucks doesn’t have the volatility of CONN, but a 2.4% premium for an eight-week holding period isn’t bad, and that’s about a 16% annualized return.

Covered Calls on Apple (AAPL)

Covered Calls on Apple (AAPL)I consider Apple (AAPL) to be both a growth and value stock, and even undervalued on a near-term basis. AAPL is growing earnings at around 15% and trades at 16 times earnings, but that’s before you back out its cash and investments. After doing that, Apple stock really is trading at about $72 per share, meaning its P/E is closer to 11.

Personally, I’d be wary of trading AAPL stock using covered calls here for fear of it being called away, but it is trading right near its all-time high, and is having trouble breaking the $100 barrier.

I would consider selling the Sep $100 calls for $2.41, a generous premium for a five-week holding period, translating to an annualized return on AAPL stock of 25%.

As of this writing, Lawrence Meyers was long CONN, SBUX and AAPL and has sold Sep $45 covered calls against CONN.


Article printed from InvestorPlace Media, https://investorplace.com/2014/08/covered-calls-aapl-sbux-conn/.

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