I’ve previously discussed the beauty of both holding a stock and selling covered calls against it, particularly if you hold blue-chip stocks and they pay a dividend.
Not only do you get to own a relatively safe stock that will climb over the long-term, but you can collect its dividend, and even collect some covered call premiums if you sell those calls on blue-chip stocks far enough out.
If you sell covered calls on those blue chips into next year, they are called LEAPs. Remember, if you sell a covered call, it means you own the underlying stock and you have sold the right for someone else to force you to sell them that stock at a certain price on or before a certain date.
The hope is that these blue-chip stocks don’t breach those prices, so you keep both the stock and the premium you earned for selling the contract.
Big Money Blue Chips: Lowe’s Companies, Inc. (LOW)
Lowe’s Companies (LOW) showed why it’s one of the blue chips, as it delivered stellar earnings this quarter, and that makes it a great choice for LEAPs.
It is likely that the path of least resistance is up for Lowe’s. You can choose to hedge your bet if you think the market as a whole may come down over time and take LOW down with it.
Alternatively, you can choose to capture some possible upside and sell LEAPs that are a bit out-of-the-money to pick up the best of all worlds.
LOW closed at $78.50 on Wednesday. The Jan 2017 $85 LEAPs present an interesting deal. First of all, they are selling for $2.95. So right away, you pick up a 3.75% return on the contract. If it is called away, you’ll also earn $6.50 in capital gains. You will also get three dividend payments, totaling 84 cents.
Thus, if called away, your total return would be $10.29 or 13%. Not bad at all.
Big Money Blue Chips: JPMorgan Chase & Co. (JPM)
JPMorgan Chase (JPM) remains one of the premier, and probably safer, financial services outfits in the country. It’s a solid play, even if the economy struggles.
It survived the financial crisis and is doing quite well in a sector that becomes more important on a daily basis to the human experience. We simply cannot live without financial services, and JPM is at the forefront.
It also closed on Wednesday at $64. It pays a 48 cent quarterly dividend, which right now is about 0.76% quarterly.
It also provides a more conservative bet than LOW stock, but not by much. In this case, you might want to consider selling the Jan 2017 $70 LEAPs for $1.85.
With the $6 in capital gains and three dividend payments, you end up with $9.29 total return, or about 14.3% over eight months, which is 21% annualized.
Big Money Blue Chips: Apple Inc. (AAPL)
There aren’t too many companies that are more controversial right now than Apple (AAPL), and that truly presents a great opportunity for investors.
I think $90 is a floor for the stock, but it may not go too crazy over the next year. AAPL has become a “show me” stock, and will have to prove to investors that it remains on the right track.
While the market is indecisive, you can make money with LEAPs and dividends. The stock closed at $94.56 on Wednesday. Apple stock is volatile, though, so you have many choices.
The Jan 2017 $100 LEAPs are selling for $5.45. That’s a 5.75% return. Add in $1.71 from 3 dividend payments and the $5.44 in capital gains, and you’ll end up with total returns of $12.60, or 13.3%. That’s probably the best Apple stock will do anyway in the next year.
Alternatively, you could virtually guarantee your stock gets called away by selling the the Jan 2017 $95 LEAPs are selling for $7.60. That’s an 8% return. Add in $1.71 from 3 dividend payments and the 44 cents in capital gains, and you’ll end up with total returns of $9.81, or 10.1%.
As of this writing, Lawrence Meyers was long AAPL.
