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4 High-Risk, High-Return Covered Calls

Covered calls aren't just for conservative income generation


I’ve written before that my preferred method of generating covered-call income is to buy a stock you want to hold long term, and sell calls against half your position for an anticipated return of 2.5% per month. However, a few folks with greater risk appetite have written to me asking about getting larger relative returns from their covered call plays.

We aim to please, but be careful what you wish for. Here are stocks you can buy that may not be a great idea to hold for the long term, but that you actually want to get called away after you sell calls against them.

First up is MAP Pharmaceuticals (NASDAQ:MAPP). The risk here is that this is a drug development company. If something happens between now and April expiration that is really bad for one of its pipeline drugs, the stock could get hammered. The good news, however, is that when it comes to options, you are only playing the risk for a short period of time. If you buy the stock at Tuesday’s close of $16.62 and sell the April 17.5 call for a net credit of $2.70, then you’ll pick up a 21.5% return, with downside protection to $13.92.

A more interesting pharma play that does not expose you to the risks a development company has is Spectrum Pharamceuticals (NASDAQ:SPPI). Spectrum actually looks for and then purchases late-stage drugs, or those already on the market, that simply aren’t being marketed as effectively as they could. The company has almost $2 per share in cash on its books with no debt, so they are not leveraged and they went free cash flow positive this past year. So there’s not a tremendous risk here, and in the event you end up buying the stock and getting stuck with it, I think you’ll be owning a good company. Buy the stock at $14.13 and sell the April 14 call for $1.90. That’s a 12.5% return with downside protection to $12.23.

You also can play gold in a very exciting way by buying the Direxion Daily Gold Miners Bull ETF (NYSE:NUGT), which gives you exposure to the precious metal sector but not the volatility of the metal itself, as the ETF focuses on the miners. Selling an April 26 call for $3, with the ETF sitting right at $26, gives you an 11.5% return with downside protection to $23. Be careful, though, as this is a 3x-leveraged ETF. Hey, you asked for something more risky!

Likewise, another less-volatile play in a similar arena is INTL FCStone Inc.  (NASDAQ:INTL), which provides foreign exchange and treasury securities execution, physical commodities trading and execution, and structured over-the-counter commodity services. So it’s an infrastructure play in the volatile commodities space. This is another name with, no debt, cash on hand, and cash flow positive, so there’s limited risk. Nevertheless, there is lots of volatility here. Buy the stock for $23.36 and sell the March 25 call for $1.45, and pick up a 13.2% return if it gets called away.

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.

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