Are you a conservative investor who is either retired or only focused on income stocks? If so, you might think options aren’t for you. However, selling covered calls is a fairly easy concept that meshes with the endgame of generating income.
And this approach can involve blue-chip stocks, so you can keep your conservative investment strategy.
The skinny: Selling covered calls involves you owning a certain stock, then selling the right for someone else to buy that stock from you at a given price (strike price), on or before a certain day (expiration date).
You believe the stock is not going to trade much above that strike price before expiration rolls around. If the stock doesn’t go above that strike price before expiration, or does not close above that strike price on expiration, you get to hold onto the money that you were paid (premium), as well as the stock. But should the stock close out above that strike price on expiration, you will have to sell it at the strike price (but you still keep the premium).
Here are three covered calls of interest surrounding three very well-known blue-chip stocks:
Covered Calls on Berkshire Hathaway Inc. (BRK.B)
You probably didn’t know that you can sell covered calls against Berkshire Hathaway (BRK.B) I love selling covered calls on BRK.B, because if shares aren’t called away, I’m very happy to own Berkshire and sell more covered calls against it.
And, of course, if BRK.B does get called away, I can just buy it back and sell covered calls again, or just hold it. Because Berkshire is going to be a great stock for the very long term, it doesn’t really matter to me what happens.
Tuesday saw BRK.B stock close at $137.94. You could sell covered calls against either the $135 or $140 strike price, but I prefer the latter. Sell the Dec $140 covered calls for $2, and earn 1.5% in premium alone for the 45-day holding period, plus another 1.5% in capital gains if the stock is called away.
As a note: Berkshire reports earnings Friday, Nov. 6.
Covered Calls on Boeing Co (BA)
Another one of my go-to blue chip stocks for covered calls is Boeing (BA). Of all the stocks that I believe will go up over time, BA is one of them. The reason is simple: Boeing is one of very few companies that actually builds airplanes.
It’s not like you can walk down to the corner and buy a 767 for your fleet.
So, with BA stock being part of what’s effectively an oligopoly, it should be in your portfolio. It also isn’t very volatile, so while you don’t earn big premiums, you can sell covered calls against it repeatedly.
On Tuesday, BA stock closed at $148.09. Once again, you are kind of in between strike prices here, so I usually opt for the higher one to get capital gains if it is called away. The Dec $150 covered calls is selling for $2.60, which is a 1.75% return for 45 days, or about 13.7% annualized. Capital gains would add an extra 1.3% onto the trade.
Covered Calls on McDonald’s Corporation (MCD)
I might not normally suggest you get involved with McDonald’s (MCD), but there’s a lot of optimism surrounding the company after its last earnings report. That has pushed MCD stock up to all time highs, and I think it’ll stay in that area until January’s earnings, giving you a chance to sell some covered calls.
You could go either way here, as MCD stock is between strikes, closing Tuesday at $112.08.
You could sell the Dec $110 covered calls for $3.85. You get a huge 3.78% premium and keep it if it isn’t called away. However, if it is, you’ll give back $2.08 in capital losses for a net gain of $1.77, which is still an OK 1.5% return.
Or you could sell the Dec 18 $115 covered calls for $1.41, enjoy a 1.3% return, and possibly another 2.9% if it is called away.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he was long BRK.B. 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.
