The market has been gyrating lately, with some huge days on both the up and down side for the blue chips. Volatility is good for covered calls on blue chips, since premiums are tied to volatility.
Also good for blue-chip covered calls is that the market has been churning inside of a wide volatility band. That means there’s less chance the blue chips you wrote covered calls against will get called away.
Thus, right now’s the time to play these covered calls, as you’re getting relatively high premiums compared to normal (often, blue chips offer less than 1% for a four- to six-week holding period), and you have a higher likelihood of keeping your stock.
Each of the following three stocks has its own perks and issues, making these covered calls particularly intriguing.
Covered Calls on McDonald’s (MCD)
McDonald’s (MCD) has been struggling over the past couple of years. Sales have been softening, and the company has endured the pink slime public relations nightmare. The stock presently is at $92.01, well off its 52-week high of $103.78.
This is a good opportunity to sell the Nov $92.50 covered calls on this blue chip stock for $1.11. First, you collect a 1.2% premium, which is a bit higher than you might normally see for both MCD stock and for something that’s 49 cents out of the money. And should MCD stock get called away, you will collect the 49 cents in capital gains as well, for a total return of 1.74%. That’s for a mere 26-day holding period, which translates to 24.4% annualized.
Because MCD stock has been struggling, you are likely to be able to either keep rolling these calls into the next month if not called away, or buy the stock back and sell covered calls again at the nearest strike.
Covered Calls on 3M (MMM)
3M Company (MMM) is one of my favorite American blue-chip companies, and now is a good time to sell covered calls against it. At $149.56, MMM stock is right near its all-time high, the company continues to do well, and its balance sheet and cash flow are in solid shape.
With the market churning as it is, sell the Nov $150 covered calls for $2. That’s a 1.33% return for that small 26-day window. If called away, the extra 44 cents in capital gains gives you a total return of 1.63%, or 22.9% annualized.
I think 3M is more likely than MCD to get called away, but by cycling covered calls, you continue to collect premium. If the stock doesn’t get called away, you hold a premium blue-chip company.
Covered Calls on General Electric (GE)
As for blue chips, there’s also General Electric (GE). Another of my long-time favorites, the stock trades at $25.52, which is about 10% off its all-time high of $28.09.
The churning market means you can sell the Nov $26 covered calls for 20 cents. This is one of those times where picking up the additional 48 cents in capital gains nets you even more than the option premium. If called away, you make a total of 68 cents, or 2.67%. That’s a 37.5% annualized return.
This is a better deal than selling the $25.50 strike price. Even though you get double the premium at 42 cents, GE likely has an upward bias given its importance to the Dow Jones Industrial Average.
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.
