One category of stocks that I like to sell covered calls against is Internet stocks — that is, companies that are in the e-commerce arena.
There are plenty of reasons to like Internet stocks broadly, but I like that these companies tend to have robust cash flow, which places them in great position to survive economic and market crashes. Cash flow often results in cash being added to the company’s own cash hoard, buttressing it for hard times.
Thus, outright owning these Internet stocks themselves is a good idea; I like all of the companies I’m about to talk about for their long-term potential.
However, I also like the idea of selling calls against half or more of a position because they also tend to have enough volatility that they offer juicy premiums. You are often able to get more than 2% for a four- to six-week holding period, which is generally a target I like to hit when selling covered calls.
Without further ado, then, here are the picks for covered calls:
Covered Calls on Liberty Interactive (LINTA)
Liberty Interactive (LINTA) is the first candidate in this space.
LINTA is one of several tracking stocks under the Liberty banner, which is chaired by John Malone, one of America’s greatest investors. Malone likes to buy Internet businesses that not only have strong cash flow, but which have a dominant position in their particular market. For example, Bodybuilder.com and backcountry.com are the 800-pound gorillas in their respective markets.
LINTA stock trades at $28.88, and the July $29 calls are at 80 cents. That’s about 2.7% for a roughly four-week holding period, and if the stock gets called away, you also pick up the 12 cents in capital gains, for a total return of 3.5% (45% annualized).
Covered Calls on IAC/InterActiveCorp (IACI)
John Malone has done many deals with fellow mogul Barry Diller, who chairs IAC/InterActiveCorp (IACI), the parent company to such names as Ask.com, About.com, Match.com, OKCupid.com, HomeAdvisor, Vimeo and many more internet businesses.
IAC routinely generates more than $300 million in free cash flow annually, and the company has more than a billion dollars of cash on hand.
IACI stock stock trades at $68.82. The July $70 call sells for $1.60, offering a 2.3% return. The additional $1.12 in capital gains comes with it if it gets called away, for a total return of 3.95% (47% annualized).
By the way, I also like selling the Oct $70 for $3.90, or $5.02 if called away, for a total return of 7.3%.
Covered Calls on Expedia (EXPE)
Expedia (EXPE) has been on the move recently, thanks to more attention being given to the online travel industry.
EXPE holds more than $2 billion in cash and generated $455 million in free cash flow in FY13. EXPE stock is growing earnings per share at 20% annually, and its growth stock status plus recent volatility is giving it very attractive options premiums.
EXPE stock trades at $80.35, but the July $80 call sells for $2.65, or a whopping 3.5%. If it gets called away, you’ll lose 35 cents on the capital loss side, but still earn a return of 2.86% (34% annualized).
Lawrence Meyers does not have a position in any securities mentioned.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. 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 email@example.com and follow his tweets at @ichabodscranium.