With a new calendar month comes another round of trying to earn $1,000 in options premium income via covered calls.
My $1,000 mark is somewhat arbitrary. You can always earn premium income from options; a grand just happens to be a number I can generate given the size of my portfolio. But to hit this target, you probably need more than $50,000 in aggregate assets (and having some margin available can’t hurt).
I like covered calls because I traditionally only will use them on stocks that I either want, or don’t mind holding for an extended period of time. These are solid, world-class companies that are executing well and growing earnings. If we hit a market correction while I have calls sold against some or all of my position, I’m happy to hold the stock. Plus, I’ve offset some of the downside by collecting the premium on the covered calls.
If the stock gets called away, I might miss out on some of the upside. That’s why I usually only sell covered calls against half my position.
Now, onto the options.
Covered Calls on Visa (V)
One of my recent new favorites is Visa (V). It’s never a bad thing to own an effective duopoly. V stock is a global institution that just keeps growing at a 20% clip, even after being in business for so long. $7.59 per share in earnings in FY13 are projected to grow to almost $9 this year, and I think that’s amazing.
V stock trades at $214.84 as I write, so that places it right where I like it — a hair below a strike price, in this case the $215 level. The July 19 $215 covered call is the way to go here.
First, it sells at $2.58, so that’s a 1.2% return over a mere 11 trading days, or a 31% annualized return. That’s a great return for such a short holding period on V stock.
Second, it gets you out of the option before earnings are reported. You don’t want to hold through earnings if you can avoid it. It just can throw your investment strategy a curveball.
Two contracts get you $516 in income.
Covered Calls on Whole Foods Market (WFM)
At $38.95, however, I think you have more upside potential than downside risk over the long term.
The July 25 $39 covered call sells for 91 cents. That is a very generous 2.3% return for holding WFM stock just over three weeks, or about 39% annualized. Earnings are reported on July 30, so you’ll have exited this trade by then. Keep an eye on the stock. I expect earnings will move WFM stock significantly. I just can’t tell you which direction, and that means volatility, which means high premiums.
Buy three covered calls for $273 in income, bringing you to $789.
Covered Calls on Apple (AAPL)
Apple (AAPL) remains a great covered calls play. If you held it pre-split, you have seven times as many shares to play with, so you can sell covered calls against your position if you wish.
AAPL stock trades at $93.39. The oddball split means all the options that previously existed have been sliced into many strike prices, so you have quite a choice. I like the July 19 $93.93 covered calls, which sell for $2.25. Again, you have a 3% return here, and if it gets called away, that return bumps to 3.5%, or more than 50% annualized!
Be aware, though, that earnings come in that week. You might choose to buy back that option before earnings report.
One covered call gets you $273, which brings you to a grand total of $1,062.
As of this writing, Lawrence Meyers was long AAPL and WFM. 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 at @ichabodscranium.