3 Covered Calls for a Safe $1,000 in Income

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There are two kinds of covered calls as far as I’m concerned.

3 Covered Calls for a Safe $1,000 in Income

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There are covered calls you sell on just any old stock, especially ones that are attached to momentum stocks, and can give you big premiums.

But the problem with this approach is that if you sell covered calls against one of these stocks, collect the premium and feel rich, and the bottom falls out of that momentum stock, you are stuck with something you may never see your investment back on.

Yes, I learned this the hard way.

The other kind of covered calls are those you sell against rock-solid companies, such that if you get stuck holding the underlying stock, you don’t mind one bit. In fact, you welcome it. You know the stock will go higher in the long run, if not the short run.

Today, I’d like to look at the latter, so here are three stocks to sell covered calls against and earn a solid $1,000 this month.

Covered Calls on Whole Foods Market (WFM)

Covered Calls on Whole Foods Market (WFM)Whole Foods Market (WFM) has been struggling as of late, but I’ve also said that if you can buy WFM stock below $40, that’s a good long-term move. Yes, the company is out of favor right now, but Whole Foods has a stellar balance sheet, and I believe it’s about to enter a new phase just as Starbucks (SBUX) has in the past.

Well, guess what? WFM stock is trading at roughly $39.50 as we speak — a great place to buy in and sell covered calls.

You’ve got choices about expiration date, in terms of whether you want to go before or after earnings. I’m going to suggest selling three Aug $40 covered calls for $1.53, which expire after earnings, for $459 total.

If WFM stock beats, then the stock rises, and your shares of WFM stock get called away, you pick up a 4% return for a 52-day holding period, which is 28% annualized (plus another 1.3% in capital gains, so a total 37% annualized).

If it misses, you get Whole Foods at a good price and can even average down for more.

Total Income: $459

Covered Calls on Starbucks (SBUX)

Covered Calls on Starbucks (SBUX)Speaking of Starbucks, the company is firing on all cylinders and continues to judiciously expand its products and brand. SBUX isn’t afraid to experiment, and when it finds something that works, it milks it for all it’s worth.

SBUX stock closed Tuesday at $53.62. It’s right in the middle between two strike prices, which annoys me no end.

The best you can do here — and I do like the trade — is to sell two Aug $55 covered calls for $1.15. While only a 2.1% return, you’d also pick up $1.38 in capital gains, which is another 2.5%, for 4.5% total.

I actually think this is likely to occur. SBUX stock has a history of moving strongly after earnings, and I think it will beat again this quarter, so your Starbucks shares will get called away.

Total Income: $689

Covered Calls on Yum Brands (YUM)

Covered Calls on Yum Brands (YUM)For the final selection, look for the rock-solid company we all know as Yum Brands (YUM), the parent company of KFC, Taco Bell and Pizza Hut.

The company is very solidly in Peter Lynch stalwart territory, growing EPS at more than 10% annually. It generates incredibly reliable and consistent cash flow, and uses it to pay a 1.8% dividend.

YUM is a great stock to sell covered calls against, even if I find it a bit overvalued.

In this case, earnings are midway through the month. I would still look to the August expiration date for selling covered calls here. With YUM stock right around $90, sell just one Aug $90 covered calls for $3.40, or 3.8%.

Total Income: $1,029

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he was long SBUX. 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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