Covered Calls: 3 Stocks, $1,000 in Income

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Covered calls were the first (and for many years, the only) type of options I used.

covered calls sbux, fcfs, v

The concept behind covered calls is very simple: You hold a stock, and you sell the right for someone else to buy that stock at a given price on or before a given date. In exchange for that right, you collect a fee, called a “premium.” The size of the premium is dependent on the volatility of the stock and how far off the date is that you arranged the buy/sell contract for.

The best use for covered calls is to collect premiums on a stock that has just enough volatility to offer a nice premium, but also is moribund enough that the stock doesn’t get called away from you. Much of this depends on experience. The more you study a given stock’s movement, the better chances you’ll have of selling covered calls effectively.

I’ve been studying these three stocks for a while, and have a few ideas on how to generate about $1,000 worth of income by trading covered calls on them.

Covered Calls on Starbucks (SBUX)

Starbucks stock SBUX covered callsStarbucks (SBUX) is sometimes a good covered call play because the stock goes through periods of high volatility, and other times it’s pretty quiet. Like many large caps, SBUX stock tends to get more volatile around earnings or when the market as a whole is going through large moves, as it did Monday.

SBUX stock, as of this writing, trades at $72.19. If you hold Starbucks (as I do), and plan to hold it forever (as I do), then during a period when the market is going down, you can collect a nice premium without worrying too much about the stock getting called away.

The SBUX November $72.50 covered call is selling for $3, which is 4.1% for a five-week holding period. Were the stock called away, you’d also get the 31 cents in capital gains tacked on for a total return of 4.5%. That’s an annualized return of 47%, and when it comes to covered calls, that’s very attractive.

Sell one of these for $300 in premium.

Covered Calls on First Cash Financial Services (FCFS)

Covered Calls on First Cash Financial Services (FCFS)First Cash Financial Services (FCFS) is the best long-term plan in the pawnshop sector, as it pioneered and executed on a Mexican expansion in fantastic fashion. FCFS generates great cash flow and solid earnings growth. It’s also a stock that is out of favor, and is being held back by a misunderstanding of U.S. regulatory risk.

Nevertheless, FCFS stock has always offered juicy premiums on both the covered calls and puts. In this case, the stock trades at $54.12. The Nov $55 covered call is selling for $2, which is a fantastic return of 3.7%, with another 1.6% in capital gains if called away. That’s a 5.3% return for a six-week holding period, or about 45% on an annualized basis.

Sell one of these for $200.

Covered Calls on Visa (V)

Covered Calls on Visa (V)The last stock to look at for covered calls is Visa (V). Not only is V stock a great company in an effective duopoly, but you can bet that it’s going to be around for a very long time. Selling options against V stock has proven particularly lucrative for me in the long run.

The stock closed Monday at $204.28. The Oct 24 $205 covered call is selling for a whopping $5. That’s a 2.4% return for the expiration date that is just 11 days away! As it is, I think the stock is a good bargain right here, so whether or not it got called away wouldn’t matter. I would just buy it right back.

That 2.4% premium, by the way, gets bumped to 2.8% with the capital gain if it is called away. The annualized return in this case — hold on to your seats — is 92%. It’s a great time to buy the stock and let the calls fall where they may.

Sell one contract for $500. That brings your total for all three to a clean $1,000!

As of this writing, Lawrence Meyers held shares of SBUX. Meyers 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/2014/10/covered-calls-1000-income/.

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