The year is approaching its end, and with it comes an options expiration date for some stocks of Dec. 31. That means if you are looking to bank some dough before year-end — so you can splurge on whatever resolution you choose to dive into — now you can.
Of course, there are a few requirements.
To sell covered calls, you must own the underlying stock of the options you are selling (hence the term “covered”). Then, you’d best be aware that the stock could get called away from you on or before New Year’s Eve. There’s nothing stopping you from buying it back, or buying the covered calls back, but the whole point of the trade is that you are hoping to collect the premium and hold onto the stock.
With all that in mind, here are three covered calls you should consider as we speed toward 2016:
Covered Calls on Expedia Inc (EXPE)
Expedia (EXPE) has been on a tear as of late. EXPE stock took off recently on news of both great earnings and the purchase of HomeAway (AWAY). The online travel industry remains in fantastic shape, and is only getting better.
And it may be a good time to sell covered calls against EXPE stock because John Malone, whose Liberty Interactive (QVCA) owns a portion of the company, is going to spin it off. He obviously thinks the price may have topped for awhile.
That means if you bought EXPE stock at Monday’s close of $123.11, you could gobble up some great premiums on the covered calls. The Dec 31 $123 covered calls are going for $4.45. That’s a very generous premium of 3.6% for a 31-day holding period, or about 43% annualized. That’s even with the 11-cent loss you’d incur if the stock was called away.
It’s unusual to see that high a premium on Nasdaq stocks, so grab it while you can.
Covered Calls on Facebook Inc (FB)
Facebook (FB) has the requisite volatility to attract options traders, and there’s a pretty good chance that even if you are “stuck” holding the stock, you are probably in good shape.
I think FB stock is too pricey as an investment, but using it to trade around, including covered calls, makes for a reasonable strategy.
Monday’s closing price was $104.24, so you have a couple of choices here. You could sell the Dec 31 $104 covered calls on FB stock for $3.10. That gives you a very attractive premium of just about 3%, or 36% annualized. However, you’ll lose 24 cents if called away, for a net gain of 2.8%.
You could instead choose to sell the Dec 31 $105 covered calls for $2.70. In this case, the premium itself is worth 2.7%. However, if it is called away, then you pick up an additional 76 cents in capital gains, or about 0.75%, for a total return of 3.45%.
Covered Calls on Boeing Co (BA)
If you want to play things a bit more conservative with a blue-chip stock, there are many attractive choices using Boeing (BA) options.
I love this company because there are only so many airplane manufacturers in the entire world, so BA stock will always do business.
Monday’s close was $145.45. With the price right between two strikes, you have a couple of choices. You could sell the Dec 31 $145 covered calls for $4.55. That’s actually quite high of a premium for BA stock, coming in at 3.1%, or 37% annualized. Usually, you’re lucky to get 2% to 2.5%. Of course, you’d lose the 45 cents in capital losses, netting you out at 2.8%.
Or you can sell the Dec 31 $146 covered calls for $4.20. That’s about 2.9%, plus you’d pick up another 55 cents, or 0.4%, if the stock is called away, for a total return of 3.3%
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
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