3 Covered Calls for Big Options Income

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Selling covered calls to generate options income is one of my favorite strategies to turbocharge the returns of my portfolio.

covered calls options income

I prefer selling covered calls on great companies for options income because I don’t want to buy into a lousy company that may happen to have an enticing premium. I tried that during the Internet bubble. All that happened was I bought a stock at $140, sold a covered call for $20, thought I was a genius … and then the company revealed itself to be the dog I knew it was, and it went to zero.

Now, I just go for great small and mid-cap companies where possible, which sometimes peeves my editor, who says, “Can’t you go after at least one small- or mid-cap stock people have actually heard of for this article?”

My reply? “They should know about these stocks now. They are great companies!”

Small and mid-cap stocks tend to have much higher potential for options income than large caps and blue chips, as smaller stocks tend to have more volatility. But if you can lock into a handful of such companies that you want to hold and generate extra income from, then go for these smaller covered calls:

Covered Calls on Portfolio Recovery Associates (PRAA)

Covered Calls on Portfolio Recovery Associates (PRAA)Portfolio Recovery Associates (PRAA) is a great company that is growing quickly. It is one of the nation’s largest debt collectors, buys debt on the cheap and collects more from the debtors than it paid. However, the stock is stagnant because the CFPB has been pressuring debt sellers to tighten up on compliance.

I don’t see the regulatory situation changing much in the next three months. So, while the market waits for this to sort out, it’s a great time to sell some covered calls for options income.

The stock closed Wednesday trading at $56.82. I might consider selling the Dec $55 covered calls for $4.10. Backing out the $1.82 you’d lose if called away, that gives you just about a 4% return for a three-month holding period, or 16% annualized.

Covered Calls on Casey’s General Stores (CASY)

Covered Calls on Casey’s General Stores (CASY)Casey’s General Stores (CASY) is a stock that I’ve followed and written about before. I like the overall business model of convenience stores scattered throughout the Midwest, and recent earnings came in solid, beating estimates by 11 cents, with grocery comps up 7.7%. The stock popped on the news, which means there’s some volatility to play with. Meanwhile, Casey’s has a good balance sheet, plenty of cash flow and a sizable footprint and brand name.

CASY stock trades at $70.49. I might consider selling the Oct $72.50 covered calls for $1.10. That gives you a 1.5% return just on premium alone, or about 12% annualized. However, if called away, you get the $2.01 in capital gains along with it, raising the total return to 4.3% for a mere six-week holding period, or 36% annualized.

Covered Calls on First Cash Financial Services (FCFS)

First-cash-financial-fcfs-stockFirst Cash Financial Services (FCFS) is a stock I’ve followed for 10 years. I am a national expert in consumer credit, have met many times with management, and believe this is single best play in the consumer finance sector, thanks to gangbusters growth and execution in the Mexican pawn market.

First Cash trades at $55.11, an arguable value given its 15% EPS growth and fantastic balance sheet and cash flow. It always has great options income premiums, and you can sell the Sep $55 covered calls for $1.75. That’s a 3% return in just 10 days. Annualized, that’s something like a 108% return.

Of course, you won’t necessarily get that return, but the annualized numbers help compare apples to apples.

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. 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-options-income/.

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