Santa Claus is coming to town, and he will not appear in a red suit with reindeer, but as an options trader with covered calls in his sack.
For those who are looking to generate a little extra money to buy holiday gifts, covered calls can provide one way to make that extra moolah for your elves.
Covered calls allow you to sell the right for someone else to buy a stock you own at a particular price on or before a given date. If the stock either moves way above that price before that date, or closes at or above that price on that date, you will be forced to sell the stock. If not, whatever you got paid for selling that right will be pure profit.
You actually keep that premium regardless. It’s just a question of whether the stock gets sold with it.
So here are covered calls with expiration dates on or around Christmas Eve. Ho ho ho!
Covered Calls on Starbucks Corporation (SBUX)
Starbucks (SBUX) has been on a tear lately, approaching its all-time high of $64. SBUX stock is something you want to hold for the long term, but it’s also a great stock to sell covered calls against because the premiums are usually pretty large due to a standard level of volatility that entices options traders.
You have a few choices with SBUX stock having closed Monday at $60.68. You could sell the Dec. 24 $61 covered calls for $1.66. That’s a 2.7% return just for the covered calls, and if called away, another 0.5% in capital gains.
If you’re in a New Year’s mood, you could also sell the Dec. 31 $60.50 covered calls for $2.10. Here you get a whopping 3.5% return, and if called away, your capital loss on the stock only reduced that total return by 0.03%.
Covered Calls on McDonald’s Corporation (MCD)
If there was ever a time to sell covered calls against McDonald’s (MCD), it’s right now. I think the market has given MCD stock way too much credit for its turnaround, which is in its very early stages.
The last earnings report drove the stock higher, and it is only $3 off its all-time high. I think this is way too optimistic. MCD stock has a long trek to get back to civilization from the North Pole. Ho ho … no.
So with MCD stock closing Monday at $111.06, you have two choices. You can sell the Dec. 24 $110 covered calls for $3, and collect that very nice 2.75% premium. Now, you could also be more aggressive if you think MCD stock is going to fall between now and then. If so, you cold sell the MCD Dec. 24 $108 covered calls for $4.25. In this case, you pick up 3.87%, but risk seeing it shrivel up to a 1.3% return if called away.
Covered Calls on Amazon.com, Inc. (AMZN)
If you’re like me, you probably think Amazon (AMZN) is headed for a fantastic holiday season. So I’m virtually counting on the possibility that AMZN stock is going to be higher on Christmas than its Monday closing price of $647.81. I just don’t see how Amazon bobbles the ball, unless consumer confidence suddenly craters between now and then.
You can make some big money here, provided you are OK with holding AMZN stock in the event that it falls significantly. The Dec. 24 $647.50 covered calls are selling for a mighty $25.50. Yes, that is not only a 4% return, but it’s $2,550 in cold hard cash you pocket right now.
If you want to be more conservative, sell the Dec. 24 $610 covered calls for $68. On the one hand, you pocket $6,800. However, you have to assume it will be called away, and you’ll take a $37.81 capital loss to offset it, for a net gain of $3,019.
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.
