When it comes to covered calls, you have two approaches: The first is a hedging strategy if you think a stock may be selling off, but you want the security in your portfolio. By selling covered calls against it, you are handing off any potential upside and offsetting a portion of a possible loss in the near term (during the term of the covered calls contract)
My preferred method of using covered calls, however, is the second approach: generating income from a long-term diversified portfolio. This is just one of the options strategies I’ll be using in my forthcoming stock advisory newsletter, The Liberty Portfolio.
If you sell a covered calls contract, that gives another investor the right, but not the obligation, to buy your stock at a given price on or before the contract’s expiration date, and in exchange you earn money called a premium.
You keep the premium no matter what. If the stock ends up below the contracted “strike” price after the expiration date, then you get to keep the stock as well.
Here’s how you can make $1,000 for the next month using covered calls on stocks that I actually lost track of over the past few years.
Covered Calls: Microsoft (MSFT)
After Bill Gates left Microsoft Corporation (NASDAQ:MSFT), I stopped caring about the company and MSFT stock. That was a big error, because the company transformed itself in ways I never expected, and over the past decade-plus, MSFT stock has performed admirably.
Microsoft stock offers volatility for solid premiums and is relatively safe as a long-term hold.
I like to focus on safe stocks mostly because I vastly prefer long-term portfolios. If these safe stocks aren’t called away, I am glad to hold onto them. Covered calls that generate enough volatility to create a 1.5% premium or so over a month or six weeks works for me.
Microsoft stock closed Wednesday at $65.56. The 12 May $66 covered calls are selling for $1.40. That’s about 2.15%, and you also would pick up 44 cents per contract in capital gains if called away. Just counting the premium, however, if you sell four of these you’ll collect $560.
Covered Calls: AT&T (T)
If you want a nice, safe, boring stock — which can still work very well for covered calls, check out AT&T Inc. (NYSE:T). With its continued infiltration into the media world, T stock is shaking itself out of the doldrums of telecom. It already gobbled up DirecTV, and now has a deal in place to buy out Time Warner Inc (NYSE:TWX).
I can’t say how the returns for T stock will stack up over time, but the TWX purchase does give it some juice. Plus, it has a consistent dividend.
T stock closed Wednesday at $41.51. The 12 May $41.50 covered calls are selling for 53 cents. That’s only about 1.2%, but perfectly acceptable considering the mix of covered calls I’m using.
Think about selling four of these, and generate another $212, or $772 in total.
Covered Calls: Nike (NKE)
I have to admit that I never expected Nike Inc (NYSE:NKE) to continue on its growth trajectory. I started following NKE stock way back when I started investing in the mid-1990s. While it was doing phenomenally well for a long time, I didn’t believe a retail/sports apparel business could keep growing as it has.
I was totally wrong! It’s still one of the greatest American success stories that just keeps moving higher. Even though it has sunk recently, it presents a good opportunity to both buy the stock and sell covered calls against it.
NKE stock closed at $55 on Wednesday, so the obvious strike price for this trade is $55. Consider selling the 12 May $55 covered calls for $1.32. That’s a very respectable return of 2.4% for a 37-day holding period. If you sell two of these, you’ll create $264 more in premiums and put us over the top for a total of $1,036.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he has no position in any stock mentioned. 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.
