You may believe that, as a retired or income or conservative investor, that you should have no interest in options. But don’t be so quick to judge. Selling covered calls will generate income and provide you a chance to do so with little risk.
You will own a certain blue-chip stock, and in fact you may own it already anyway, and just use options to make a little more money off of them in exchange for selling earlier than you want.
With covered calls you are selling the right for someone else to buy a stock from you at a certain price (strike price), on or before a specific day (expiration date).
That’s because you think the stock won’t trade above the strike price before expiration. If that stock does not close above that strike price before expiration for more than a couple of days, or does not close above that strike price on expiration, you not only retain the money that you were paid for selling the contract, but also for retain the stock.
Now, if the stock closes above the strike price on expiration, you will have to sell it at the strike price and keep the premium.
Here are three covered calls that use this strategy:
Blue-Chip Covered Calls: Boeing Co (BA)
I love to use Boeing Co (NYSE:BA) for selling covered calls. Boeing is going to rise over time because it is part of an oligopoly — it is one of very few companies that manufactures airplanes.
So even if you sell covered calls on Boeing and BA stock is called away, you could buy right back into it and hold over time. If the stock should fall a lot, I consider that another buying opportunity. That’s the point of using blue-chip stocks — you don’t mind owning it.
Because Boeing is not a volatile stock, the premiums aren’t gigantic, but you are playing it safe anyway.
On Wednesday, BA stock closed at $131.87. The Sept. 9 $132 covered calls are selling for $2.43, which is a 1.8% return for 34 days, or about 19.5% annualized.
That’s a perfectly reasonable return for a low-risk covered calls trade, and either way, you are dealing with a quality long-term stock.
Blue-Chip Covered Calls: McDonald’s Corporation (MCD)
McDonald’s Corporation (NYSE:MCD) has made quite a recovery off its recent lows. It’s turnaround seems to be working, and having seen for myself how the menu has changed, I think MCD is setting itself up for success.
The great news is that we’ve now seen MCD take a real hit, only to recover. So even if you sell covered calls and the stock falls, you are likely getting it at a better price.
Even if MCD stock gets called away, and you buy back in, and then it craters, I would not panic. You are a long-term investor, right? That just means you can buy in at a lower price and average down. MCD stock is a winner over the long term, so don’t panic. MCD stock closed at $117.52 on Wednesday.
You could sell the Sept. 9 $118 covered calls for $1.63 at last check. You get a 1.4% premium and keep it if it isn’t called away. Or you could sell the Sept. 2 $118 covered calls for $1.50, enjoy an 1.35% return, and possibly another 48 cents in capital gains if it is called away.
Blue-Chip Covered Calls: Berkshire Hathaway Inc. (BRK.B)
I confess surprise to learn that Warren Buffett’s “I will never split my stock” Berkshire Hathaway Inc. (NYSE:BRK.B, NYSE:BRK.A) actually has options available for it. And Berkshire could be the perfect stock for covered calls.
Sure, the premiums aren’t generous, but if the stock isn’t called away, then that premium you just sold serves as a dividend (which Berkshire famously does not pay). You can even earn returns in the high single digits each year using this strategy.
Once again, if BRK.B does get called away, buy it back and then you should just go ahead and sell covered calls again. Over time, this strategy is going to pay you very well and you may or may not miss upside depending on how often the stock gets called away.
Wednesday saw BRK.B stock end at $143.63. You can sell the Sept. 16 covered calls for the $145 strike. If you elect to sell those $145 covered calls for $1.98, you’ll earn 1.35% in premium alone for the 34-day holding period.
Not bad at all.
As of this writing, Lawrence Meyers was long BRK.B stock.
