3 Covered Calls for a Cool Grand in Income

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It took awhile for me even understand what covered calls were, much less think about how to use them. (They’re not particularly complicated, but options can intimidate most people right out of the gate.)

dividend stocksInitially, I used covered calls in all the wrong ways, such as collecting mega-premiums on volatile growth stocks with no earnings.

But since then, I’ve learned better.

Nowadays, I find the most use for covered calls in augmenting my goal for monthly income. I decided a few years ago that I wanted to generate $1,000 every month using options, just to enhance my annual income. Although I usually use naked puts for this, I will occasionally use covered calls for the same purpose.

You don’t need to use volatile stocks for this purpose. You can generate premiums from very conservative blue-chip stocks if you wish. All you need is enough capital to purchase the underlying securities. While my goal is to grab a 2% premium on each trade, I’m satisfied with any premium if I reach my intended goal of $1,000 per month.

To help you along, here are three covered call trade ideas:

Covered Calls on Apple (AAPL)

Covered Calls on Apple (AAPL)The best thing that could happen to Apple (AAPL) investors who want to sell covered calls happened recently: The company’s earnings disappointed. That hit shares, and it likely means that Apple stock will be trading in a range of $120 to $125 until the next report.

With the stock at $122.37, you could buy the underlying, then sell the Aug 28 $123 covered calls on AAPL stock for $2.32. That’s just about the 2% premium I seek (1.94%), or 24% annualized.

If AAPL stock closes above $123, your shares get called away, and you keep that premium — plus an additional 63 cents per share. If it closes below the strike price … well, I don’t think it will be below $120, which is the breakeven for this trade. You’d still hold the stock, but you could sell covered calls on the next month out.

Sell three of these for $696 in premiums total.

Covered Calls on Southwest Airlines (LUV)

Covered Calls on Southwest Airlines (LUV)It’s time once again for options on my favorite airline stock, Southwest Airlines (LUV). If you took my advice over the last few options column, you sold naked puts against an oversold LUV stock and made out like a bandit.

Now you can do the same with covered calls.

LUV stock reported great earnings, so the stock soared. Its $36.31 price tag right now is a good deal, so you could go and sell the Aug 28 $37 calls for 93 cents. That’s a 2.6% premium, and that’s why I luv LUV stock for covered calls and naked puts. Moreover, if LUV stock gets called away, you make another 69 cents per share, or about 2%.

It’s not often you can generate a 4.6% return so quickly.

If LUV stock isn’t called away, you still have it at a great buy-in price and can either hold it, or sell another round of covered calls.

Sell two of these for $186, and you now have $882 total.

Covered Calls on Microsoft (MSFT)

Covered Calls on Microsoft (MSFT)Microsoft (MSFT) isn’t the company it once was, but it isn’t exactly garbage, either. While it isn’t growing all that much, it has $80 billion in net cash and generates $25 billion in free cash flow every year. It could afford to boost its 2.7% dividend and probably will begin to do so as time goes on.

In the meantime, the stock trades just 6% off its all time high, closing at $46.88 last night. The Aug 28 $47 covered calls are selling for 80 cents. It’s a great example of a 1.6% premium that I’d be happy to get for a very safe stock.

MSFT stock isn’t all that volatile, so this trade could go either way. It’s a great stock to repeatedly sell calls against whether your stock is called away because it is so stable.

By selling two of these MSFT stock covered calls, you generate another $160, bringing you to a total of $1,042.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he was long AAPL and LUV. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.

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