by Lawrence Meyers | March 18, 2014 10:26 am
Options are one of my favorite income-generating strategies, and I’ve found a lot of success in aiming for a controlled, specific target. Maybe it’s the easy math, and maybe it’s the allure of big, round numbers, but either way, I like using $1,000 as a benchmark for each set of trades.
This week I’m going to look at covered calls to generate income off of various stocks.
Covered calls can work for investors in a few ways. But for our purposes, if you hold a long position, and simply feel the stock isn’t going to move much in the near-term, you might consider selling covered calls to generate income off of some or all of the position.
Here’s a look at a few covered calls to consider:
First up is Men’s Wearhouse (MW). The stock has shown some volatility lately because of its buyout of Jos. A. Bank Clothiers (JOSB). In fact, because the latter repeatedly spurned offers from the former, there has been a lot of volatility in both stocks.
Now, the buyout has been accepted, yet some believe shareholders will vote it down while others believe a competing bid might show up.
MW stock trades at $52.74 as of this writing. The April 55 calls are going for $1.15. So if it gets called away, you make $2.26 on the difference between the current price and the strike, plus another $1.15, for $3.41 total (minus transactions). If not called away, you still pick up the $1.15. So sell four of these for $460 in guaranteed premium.
Walt Disney (DIS) has had quite a run over the past few years, and I think it might be a bit overpriced right now.
However, I still would hold this stock for the long term, because it has fantastic potential given all the amazing franchises it has purchased in recent years (Marvel, Pixar, Star Wars, Indiana Jones), so I’d only sell calls against half your position.
DIS stock trades at $81.39. The April 82 calls (April 25 weekly series) go for $2 — a nice 2.5% premium. Sell two of these for another $400 in total premium. Now you’re up to $860.
For the last selection, I suggest Berkshire Hathaway (BRK.B) B-class shares. I think this is a classic long-term hold. You want Warren Buffett in your portfolio. However, BRK.B stock has been in a long-term trading range. That’s the perfect time to sell calls against it. Even if it does get called away, there’s a decent chance the stock will fall back to its previous level so you can repurchase it.
BRK.B trades at $123.36. The April 125 Calls go for $1.40. If you sell just one, you hit the $1,000 threshold for covered call income.
And, if your B-class shares get called away, you also pick up another $1.64 in price appreciation, for a total return on the BRKB option trade of about 2.5%.
As of this writing, Lawrence Meyers was long DIS and BRK.B. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets @ichabodscranium.
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