Readers of my column know that I love covered calls as a way to both generate extra income and to hedge one’s portfolio.
Covered calls are options trades in which you buy or own the underlying stock in 100 share lots, and you sell the right for someone else to buy that stock from you at a given price on or before a given date.
You are betting that the stock will not close above the price of the contract plus the premium you received. If you do, you theoretically have “lost” out on some upside. If not, you keep the premium and the stock.
We are headed into earnings season, so this week, I’m going to suggest covered calls on stocks that I think may disappoint when they report, leaving the stocks flat or sending them lower.
Blue-Chip Covered Calls: Apple Inc. (AAPL)
Apple Inc. (AAPL) got a lot of hate from investors after its last report. I don’t actually think this report will improve much.
Mind you, AAPL is still making tons of money, just not as much as some would like. Because there was no new iPhone this quarter, I think APPL will disappoint some investors.
The market is pricing this in already to some extent. AAPL closed Wednesday at $95.55.
You have two choices since AAPL reports the week of July 19. You could sell the July 15 $95.50 covered calls for $2.01. That gives you a return of 2.1% for a holding period of just 23 days. You get out before earnings
Or you could sell the Aug 19 $95 covered calls for $3.80. That’s a return of 4%, or 3.5% if called away, which translates to 24% annualized. Either way, it’s not a bad bet.
Blue-Chip Covered Calls: Walt Disney Co (DIS)
Walt Disney Co (DIS) has been getting dirty looks from investors over ESPN and revenue declines.
I think this is much ado about nothing, personally. DIS has shown that it is able to adapt to any kind of environment, and I have confidence that CEO Bob Iger will figure this out.
In the meantime, however, investors may get disappointed in earnings and that could hit DIS stock. It closed Wednesday at $98.79.
Earnings don’t come in until the first week in August, so one choice is to sell the July 29 $99 covered calls for $1.87. That gives you a 2.2% return, if called away, for a 37-day holding period. That equates to 22% annualized.
Alternatively, if you want to set up the contract for expiration after earnings, then the Sept 16 $100 covered calls are selling for $2.95. In this case, you earn a 4.16% return if called away.
Blue-Chip Covered Calls: Starbucks Corporation (SBUX)
Another stock that investors have been sidelined on is Starbucks Corporation (SBUX).
Again, SBUX was the subject of disappointing earnings last quarter and there’s no telling what may happen this time. SBUX has not traditionally reported consecutive earnings bummers, but that doesn’t mean it can’t. Its earnings date is slated for July 21.
SBUX closed at $55.61 on Wednesday. The July 15 contract gets you out before earnings, and you could sell the $56 covered calls for $0.92, or 1.7%. You’d also pick up 0.7% extra if called away, for a total return of 2.4% or 35% annualized. That’s pretty darn good.
If you want to hold SBUX and the contract through earnings, consider the Aug 19 $55 covered calls for $2.35. That provides you with a very generous return of 4.3%, although you’d lose $0.61 in capital losses, so you’d net out a return of $1.74, or 3.1%.
As of this writing, Lawrence Meyers owned shares of AAPL, DIS and SBUX stock.
