4 Holiday Covered Call Trades

by Mike Scanlin | November 23, 2011 7:35 am

Everyone could use a little extra cash around the holidays. Here are some ideas on how you can get some by using in-the-money covered calls with a holiday theme. And at the end, we’ll show you how you can get a free iPad or gold coin.

December options expiration is on the 17th, so if you put these trades on today (Nov. 23) you would be in these positions for 24 days. You could buy these stocks, write calls against them, and then use the cash to pay for your holiday expenses.

So, in that spirit, let’s create a few holiday-themed sectors and add some candidate companies in each one that people should be attracted to while shopping and partying. (Note: These are examples; you can add your own symbols to the lists but the point is to have some diversity via different sectors.)

  • Archer-Daniels Midland (NYSE:ADM[1])
  • Chipotle Mexican Grill (NYSE:CMG[2])
  • Hershey (NYSE:HSY[3])
  • Starbucks (NASDAQ:SBUX[4]) 
  • Brown-Forman Corp. (NYSE:BF.B[5])
  • Beam Inc. (NYSE:BEAM[6])
  • Diageo (NYSE:DEO[7])
  • Coca-Cola (NYSE:KO[8]) 
  • Brown-Forman Corp. (NYSE:BF.B[5])
  • Beam Inc. (NYSE:BEAM[6])
  • Diageo (NYSE:DEO[7])
  • Coca-Cola (NYSE:KO[8]) 
  • Apple (NASDAQ:AAPL[9])
  • Hasbro (NASDAQ:HAS[10])
  • LeapFrog Enterprises (NYSE:LF[11])
  • Mattel (NASDAQ:MAT[12]) 
  • SPDR Gold Trust (NYSEARCA:GLD[13])
  • Blue Nile (NASDAQ:NILE[14])
  • Tiffany & Co. (NYSE:TIF[15])
  • Signet Jewelers (NYSE:SIG[16])

Next, from each sector we’ll enter the symbols into a covered call screener to create a list of high-yielding, in-the-money covered calls. Here are the candidates we found here at Born To Sell [17]that all yield 2%/month annualized return or better using the covered-call strategy:

Symbol Strike Annualized Return If Flat
 AAPL  360  32%
 ADM  27  29%
 CMG  290  29%
 GLD  161  24%
 KO  65  31%
 RAI  40  25%
 SBUX  40  35%
 TIF  65  34%

This is not a recommendation to automatically go put on those trades, whether to sell calls against the names you already own or to buy the stocks and immediately sell calls against them (in what’s known as a “buy-write”).

Additional diligence on those companies is required. But it is an example of how you can do a themed, diversified covered-call screen.

After coming up with a diversified list of candidates, start checking out the particulars. For example, from the above list there is one that has earnings before the December expiration (TIF, Nov 29 earnings). This may be reason enough to remove it from the list (or at least cause you to write calls that are deeper in-the-money than you normally would).

The call options in each of those candidate trades is in-the-money, meaning that the strike price is below the current market price of the stock. To have a successful covered call trade, then, you don’t need the stock to go up in order to make money.

You just need the stock to stay above your net debit, or breakeven, price, which is the price you paid for the stock minus the amount you received for the option.

AAPL Covered Calls for a Free iPad

First, let’s look at how you can get a free iPad. AAPL is trading at $372.94, and the AAPL Dec 360 Call is bid at $20.40.

You could buy 100 shares for $37,294 and then sell 1 Dec 260 call for a $2,040 credit. Your net debit, then, is $37,294 – $2,040, or $35,254.

As long as AAPL is above $352.54 on expiration day (Dec. 17), you will have made money. And if AAPL is trading above the $360 strike price, you will make exactly $746 ($36,000 – $35,254), which is enough to go buy yourself an iPad or a couple of iPhones.

SBUX Covered Calls for Free Lattes for 2 Months

Next, let’s take a look at SBUX. Buy 300 shares at $41.74 and sell 3 SBUX Dec 40 Calls for $2.58 each. Your net debit is $41.74 – $2.58 = $39.16.

If SBUX is trading above $40 on Dec. 17 and your stock is called away, you make $252 ($40 strike – $39.16 debit = 84-cent gain x 300 shares). That’s more than enough to pay for your grande nonfat lattes for two months!

CMG Covered Calls for Free Burritos Till February

How about CMG, which is trading at $308.04? You can buy 100 shares and sell 1 CMG Dec 290 Call for $23.50. Your net debit is $284.54.

If your shares get called away on Dec. 17 (that is, if the stock is trading above $290), you make $546 ($290 strike – $284.54 debit x 100), which is enough to pay for $8 burritos for 68 days.

GLD Covered Calls for a Free Gold Coin

Lastly, let’s look at GLD. This ETF is trading at $165.17. If you buy 200 shares and sell 2 of the GLD Dec 161 Calls for $6.60 each, your net debit is $158.57 per contract, or $317.14 for two.

If GLD is trading at $161 or more on Dec. 17 you make $486 ($161 strike – $158.57 debit x 200), which is enough to go buy yourself a shiny new 0.25-ounce coin.

You might want to have your free gold coin mounted and wear it around your neck so you can show all your friends what a savvy investor you are!

Trading ideas compliments of BornToSell.com[19], a subscription service that provides easy-to-use covered call investment tools for individual investors.

  1. ADM: http://studio-5.financialcontent.com/investplace/quote?Symbol=ADM
  2. CMG: http://studio-5.financialcontent.com/investplace/quote?Symbol=CMG
  3. HSY: http://studio-5.financialcontent.com/investplace/quote?Symbol=HSY
  4. SBUX: http://studio-5.financialcontent.com/investplace/quote?Symbol=SBUX
  5. BF.B: http://studio-5.financialcontent.com/investplace/quote?Symbol=BF.B
  6. BEAM: http://studio-5.financialcontent.com/investplace/quote?Symbol=BEAM
  7. DEO: http://studio-5.financialcontent.com/investplace/quote?Symbol=DEO
  8. KO: http://studio-5.financialcontent.com/investplace/quote?Symbol=KO
  9. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  10. HAS: http://studio-5.financialcontent.com/investplace/quote?Symbol=HAS
  11. LF: http://studio-5.financialcontent.com/investplace/quote?Symbol=LF
  12. MAT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MAT
  13. GLD: http://studio-5.financialcontent.com/investplace/quote?Symbol=GLD
  14. NILE: http://studio-5.financialcontent.com/investplace/quote?Symbol=NILE
  15. TIF: http://studio-5.financialcontent.com/investplace/quote?Symbol=TIF
  16. SIG: http://studio-5.financialcontent.com/investplace/quote?Symbol=SIG
  17. Born To Sell : https://www.borntosell.com/
  18. See also: Pick Up a Bargain in Microsoft Calls: https://investorplace.com/2011/11/pick-up-a-black-friday-bargain-in-microsoft-calls-msft/
  19. BornToSell.com: http://www.borntosell.com

Source URL: https://investorplace.com/2011/11/make-some-quick-holiday-spending-cash-covered-calls-aapl-sbux-cmg-gld/
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