One of the strategies I use to augment returns in the forthcoming Liberty Portfolio is selling covered calls. Over the years, I learned there are two methods for selling covered calls. One will get you into big trouble, and the other will earn you steady income with little long-term risk.
The first one involves covered calls you might sell on some cool stock that is riding high and offers big premiums. The downside with this approach is that selling covered calls against high-flying stocks — in which you gobble up the premium and feel smart — can blow up in your face if the mo-mo stock stops mo-moing. That momentum stock can crater and you may never earn back your investment.
Or you can do things the smart way. Sell calls against very solid companies, so that if you are holding the underlying security and it is not called away, you aren’t the least bit upset. You are holding a quality company. During these dog days of summer, you don’t have to worry about earnings messing up your strategy, either.
Thus, here we have three stocks to sell covered calls against that won’t necessarily kill you if you get stuck with them.
Covered Calls for the Dog Days: Nike (NKE)
Nike Inc (NYSE:NKE) has become an interesting stock again. It fell off my radar because I thought the retail juggernaut was not a big grower any more. I was wrong. I think it offers a good opportunity right now.
NKE stock has been lagging a little bit. Some of it is due to market misperception about threats, and some of it is due to general nervousness about sports apparel sales.
Still, it’s a favorable time to buy Nike stock since it is 20% off its 52-week high. With NKE shares closing at $57.64 on Wednesday, the $57.50 strike is the most obvious choice. The Oct. 7 $57.50 covered calls are selling for about $1.79.
That’s a generous return of 3.1% for a 38-day holding period. On an annualized basis, that comes out to about 29%. If it gets called away, you’ll also lose a tiny 14 cents in capital losses.
Covered Calls for the Dog Days: Starbucks (SBUX)
Starbucks Corporation (NASDAQ:SBUX) isn’t feeling the market’s love lately. I can understand why, I suppose … but every time I enter a store, I am just amazed at how far SBUX has come.
Starbucks isn’t just a coffee meeting place anymore. They’re stacked with food and the drink menu is changing all the time. I consider SBUX a core holding.
From what I can see, SBUX is roaring on all eight cylinders and is always experimenting. It isn’t afraid to try an interesting concept. I frankly like the breakfast food, for example.
SBUX stock currently trades at $55.96. I think the move here is to sell the Oct. 7 $56.50 covered calls for 89 cents. While this is only a 1.6% return, you’d have a shot to pick up 54 cents in capital gains, which is another 0.9%, for 2.5% total.
My goal with most stocks is to try to squeeze 2.5% out of all but the most blue-chip and least volatile of stocks.
Covered Calls for the Dog Days: Yum! Brands (YUM)
Yum! Brands, Inc. (NYSE:YUM), the parent company of stand-by comfort fast foods known as KFC, Taco Bell and Pizza Hut, is a staple among blue-chip stocks you can trust.
Yum! is personally not the right stock for my portfolio, but I see why it may work for other people. Thus, YUM is a solid stock to sell covered calls against for conservative investors with a long time horizon.
The stock closed at $90.71 on Wednesday. One of the reason I’m suggesting you jump in the covered calls here is because the premiums are rather generous given their usual history.
The Oct. 7 $91 covered calls are selling for $2.75. Hey, I’ll take a 3% return on a covered call any day!
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he was long SBUX. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
