I first learned about covered calls from a friend, and only after many years of investing. The idea he was goofing around with was to buy the big highfliers of the dot-com era, then sell covered calls against them for very big premiums. That could mean selling covered calls just one month in the future for $1,500 or even more.
Of course, if you were paying attention way back then, you also knew that such stocks might suddenly fall off a cliff. And they did. I ended up long on stocks that, despite the premium I received, were big losers that were dragging down my entire portfolio. So even after backing out that big premium, I ended up selling those stocks for a loss. A big loss.
Dumb, but educational.
I refined the selling of covered calls as I got more experienced. The smarter move is to purchase a quality company, sell covered calls against it, and if I get stuck with it, I’m happy to own it. That’s how I operate today, and that’s the theme behind these ideas on three blue-chip covered calls.
Covered Calls on MasterCard (MA)
MasterCard Inc (NYSE:MA) is one of the better companies you can sell covered calls against. If you get stuck holding it, you have a wonderful company that is part of an effective duopoly. Even if it disappoints in the short-term, it won’t down the road.
Even better, MasterCard stock reported quarterly earnings in the recent past, so its volatility should be pretty low. That might not lead to big premiums, but we don’t care. We just want to sell enough covered calls on these three stocks to make a decent nut.
MA stock closed at $95.59 on Wednesday. The Sep 23 $96 covered calls can be had for $2. That’s a 2.1% return for a 37-day holding period, or about 21% annualized. If MA stock is called away, add 41 cents, or about 0.5% in additional return. By the way, I target a 2% premium on quality companies for a 30- to 40-day holding period.
So, sell two of these covered calls for $400 in premiums.
Subtotal: $400
Covered Calls on Walt Disney (DIS)
I am loving Walt Disney Co (NYSE:DIS) while others hate on it because of the transitioning business model at ESPN. Still, that creates opportunity both on the long side and on the covered calls, because DIS stock is a bit less likely to be called away.
Hey, I don’t have concerns about DIS stock being called away. It’s just that selling covered calls against DIS stock right now is a really good deal. The stock closed Wednesday at $96.78. The premiums aren’t massive here, but again — we can still get good premiums on a much less volatile stock.
In this case, the DIS Sep 23 $97 covered calls sell for $1.57. That’s less than MA stock calls, but it still yields a nice 1.5% return for 37 days, or about 15% annualized. Sell three of these for $471.
Subtotal: $871
Covered Calls on AT&T (T)
AT&T Inc. (NYSE:T) typically is not much of a stock when it comes to capital gains, although if you time it right, you can squeeze out a 20% capital return by catching it at a cyclical bottom.
Right now, though, AT&T closed Wednesday at $41.86, and that’s about its highest point since 2007. T shares could be heading higher with a breakout … but they also could fall from here. Either way, AT&T may be a good candidate for selling covered calls.
The Sep 23 $42 The September 23rd $42 covered calls are selling for 70 cents. That’s a 1.6% return; very modest as far as covered calls go, but standard for blue-chip companies like T stock. That equates to about a 14% annualized return. Sell three covered calls for a total of $210.
Total: $1,081
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He is the manager of the forthcoming Liberty Portfolio, has 22 years’ worth of experience in the stock market and has written more than 1,500 articles on investing. He owns shares of DIS. He can be reached at TheLibertyPortfolio@gmail.com.
