It was many years ago, when money was a little tight for me, that I realized I could increase my monthly income by selling covered calls. I had about $100,000 in stocks and realized that if I could just boost my income by $1,000 a month, that would go a long way towards making ends meet.
In fact, depending on where the price ended up on expiration, I could turn around and just sell another set of covered calls.
Let’s look at three covered call trades that you can execute now to make $1,000.
3 Covered Calls to Make $1,000: DirecTV (DTV)
I’ll tell you one of my favorite stocks of all-time to do covered calls on, and that’s DirecTV (NYSE:DTV). You are in a great position here because the company was bought out by AT&T Inc. (NYSE:T) for $95 last year. There is still enough foolish skepticism that the buyout won’t go through that DTV stock opened at $85.60 today.
That gives you a ton of upside on DTV stock on its own, but you can hedge by buying it and selling calls.
You can play this many ways, but if you want to be super-conservative, sell the Jun $87.50 covered calls for $2.80, or $280 per contract. First, that’s an immediate return of 3.3%, or 13.2% annualized. Second, if DTV stock gets called away, you pick up another $1.90 in capital appreciation, for a total return of $4.70, or 5.5% or 22% annualized.
If you get stuck with DTV stock, and let’s say it’s because the merger is blocked, you still own a great company at a great effective price.
Sell two of these contracts for $560.
3 Covered Calls to Make $1,000: Microsoft Corporation (MSFT)
Microsoft Corporation (NASDAQ:MSFT) is a nice, safe bet. It remains a decent stock to own even if its growth prospects aren’t all that hot. The company produced tens of billions of free cash flow annually and the company isn’t going away.
MSFT stock trades at $41.44, which is 16% off its high. So there is room for upside and that means a greater chance the stock will get called away.
In this case, I like selling the May $42 covered calls for $1.23, or $123 per contract. That’s a 3% return or 18% annualized. If MSFT stock does get called away, you pick up an additional 56 cents in capital appreciation for a total return of $1.79. On a percentage basis, that’s 4.3% or 25.8% annualized.
Notice how what seems like small premiums really add up, especially if you do this over time. The annualized figures make this strategy very attractive on its own, or even to supplement a long-term diversified portfolio, as I plan to do when I launch the forthcoming Liberty Portfolio.
Sell two of these contracts for $246. You are now at $806 total so far.
3 Covered Calls to Make $1,000: Home Depot Inc (HD)
Home Depot Inc. (NYSE:HD) is in the catbird seat these days, as the leading home improvement retailer in an environment where house flipping, house renovations and home improvement are going strong. Earnings are growing at a solid clip, the company has free cash flow bonanzas from one quarter to the next and the stock keeps performing.
HD stock is at $116.40, just a hair off its all-time high. In this case, you are kind of stuck between strike prices, which are separated by $5. Many others are separated by only a buck or $2.50.
In these cases, I usually err on the side of being conservative and sell the call in the money. So sell the Apr $115 covered calls for $3.40, or $340 per contract. You only need to sell one, and that will carry you over the $1,000 threshold to $1,146.
If HD stock gets called away, you’ll lose $1.40 in capital appreciation for a net gain of $2, which still puts you over the $1,000 line. If HD stock isn’t called away, then congratulations, you’ve picked up a very nice premium of more than 3%.
As of this writing, Lawrence Meyers owned shares of HD, and had sold DTV Apr $87.50 naked puts.
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