3 News-Driven Covered Calls for Income

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Options depend a lot on volatility, since volatility is what generates premiums. So a good way to find stocks that might have options that deliver good premiums is to keep an eye on the news. After all, news drives stock prices, which drives volatility, which drives premiums in covered calls.

covered calls incomeThree well-known stocks have been in the news lately and the stocks are experiencing more volatility than usual, leading to great covered call opportunities.

  • Over at Apple (AAPL) of course, we had the big iPhone 6 announcement, as well as news regarding ApplePay.
  • Yahoo (YHOO) is seeing a lot of volatility because it owns 22.4% of Alibaba, which is about to go public. That ownership stake will translate into a huge windfall upon IPO, so the stock has been moving.
  • Home Depot (HD) has had two things pushing it recently. The first was a stellar earnings report that convinced me to buy the stock. The second was news of a huge payment card security breach.

So now is a good time to sell covered calls on all these stocks if you are looking for some additional income.

Covered Calls on Apple (AAPL)

Covered Calls on Apple (AAPL)I think Apple (AAPL) is a must-own stock, so if you are going to sell covered calls against it, I would really consider either buying additional stock for that expressed purpose or only selling covered calls against half your position.

AAPL stock closed yesterday’s trading at $101.58. I would sell the Oct $102 calls for $3.30. That’s a very robust return of 3.3% for a mere six-week holding period, or 28% annualized.

That’s a terrific return for Apple for that holding period, and in general.

Covered Calls on Yahoo (YHOO)

Covered Calls on Yahoo (YHOO)I wouldn’t necessarily buy Yahoo (YHOO) right now, but I wouldn’t be opposed to owning it either, considering the timing of the Alibaba IPO. So if I purchased YHOO stock and it wasn’t called away, I would just keep selling covered calls until it was called away.

YHOO closed yesterday at $42.59, and Oct $42.50 calls are going for $3. That’s almost as much as the Apple calls, and for a much lower base price. That means a whopping 7% return (backing out the 9 cents you lose since the current stock price is slightly ahead of the strike price) — a return I’ve rarely seen on any covered call deal. Annualized, it comes out to almost 60%.

For what it’s worth, YHOO has $7 billion in net cash, or $7 per share, so even though it’s a slow-growth company at this point, you have plenty of margin for error.

Covered Calls on Home Depot (HD)

Covered Calls on Home Depot (HD)I just purchased Home Depot (HD), so I want to hold onto it. I suspect it’s going to drift around the $90 area for a few weeks while the bad PR from the security breach plays out. That’s why you should always be up on the news — because you will know how long certain stories are going to take to play out, and that will affect your trading strategies.

HD stock closed Wednesday at $91.22. You can get $1.12 for the Oct $92 covered calls. That’s only a 1.2% return, but if HD stock is called away, you’ll also get another 88 cents in capital gains, which boosts your return to 2.2%, or 19% annualized.

As of this writing, Lawrence Meyers was long AAPL and HD. He is president of 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 pdlcapital66@gmail.com and follow his tweets at @ichabodscranium.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/covered-calls-aapl-yhoo-hd/.

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