3 Blue-Chip Covered Calls for Enhanced Premiums (RTN BA MSFT)

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Selling covered calls became one of my favorite methods for enhancing income many years ago. As a way of increasing my returns when I feel the stock may trade flat in the short to near term, selling covered calls against blue chips has proven to be a very effective strategy.

3 Blue-Chip Covered Calls for Enhanced Premiums (RTN BA MSFT)

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When selling covered calls against blue chips, you sell the right for another investor to buy stock you already own at or above a given price on or before a specific date.

The risk is that these blue chips get “called away” after they have blown through your price point, meaning you lost out on some gains. To thwart this, you can buy back the call. Or perhaps it doesn’t get called away, but the stock price drops.

That’s why I like blue chips: They are stocks most investors want to own, so if you get “stuck” with them, that’s hardly anything to be sad about.

Blue-Chip Covered Calls: Raytheon Company (RTN)

Blue-Chip Covered Calls: Raytheon Company (RTN)Raytheon Company (RTN) is trading near its all-time high, closing Friday at $129.34. One of the reasons I like RTN as a stock is because the defense sector, even in times when military budgets are being cut, is one place you have to be.

Why? Because America will always be a leader in defense contracting, and Raytheon is one of the blue chips in that sector. We will always need defense, so even if there are some years in which earnings slip, they are bound to come back.

With Raytheon covered calls, the premiums are not gigantic because blue chips are traditionally less volatile. The goal is not to hit the ball out of the park with premiums, but to sell them on a regular basis and roll them over if possible, for 1.5% to 2% returns.

The June 17 $130 covered calls sell for $1.99, so you would net $2.65, or about 2%.

Blue-Chip Covered Calls: Boeing Co (BA)

Blue-Chip Covered Calls: Boeing Co (BA)In a similar vein is Boeing Co (BA): Off about 15% off its all-time high, and closing Friday at the nearly identical price of $127.21, BA stock is likely to be another go-to of the blue chips.

We know Boeing mostly for its commercial aircraft and, since travel has been booming, so has BA stock. Yet, Boeing is also more diversified and that makes it a blue-chip stock. It also has a military division, but also has Network & Space Systems, Global Services and Support, and even a Capital division that finances and leases equipment.

BA stock gives you a chance to sell covered calls. In fact, you can get a fantastic deal by selling the June 24 $131 covered calls for $2.03. Because BA is more volatile than RTN, you can earn a spectacular 4.5% return for a 5-week holding period.

Blue-Chip Covered Calls: Microsoft Corporation (MSFT)

Blue-Chip Covered Calls: Microsoft Corporation (MSFT)Microsoft Corporation (MSFT) fell off my radar for a long time because I felt it lacked a clear identity as a company once the PC business stalled. Yet, it has clearly reinvented itself and remains one of the premier blue chips. I have to admit that having $76 billion of net cash is pretty incredible, as is generating $24 billion of free cash flow annually.

Microsoft only pays out 40% of FCF as a dividend, so holding it to get the dividend while selling covered calls is a great idea.

Of course, Microsoft stock isn’t as volatile as it once was, making it a safer play. It closed Friday at $50.62. You could sell the June 24 $51 covered calls for 90 cents. That gets you a 2.5% return for a five-week holding period, or 23% annualized.

If, by chance, you had MSFT in your portfolio already, the ex-dividend date for your 36 cent payment passed on Monday, so you can add that as well.

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2016/05/blue-chip-covered-calls-rtn-ba-msft/.

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