Covered calls can serve two purposes: The first usage is as a hedging strategy if you believe a stock may be headed lower, but you want it to be in your portfolio. By selling covered calls against it, you are giving up potential upside while offsetting some potential loss your stock might have during the contract term.
I prefer to think of covered calls, however, as another way to augment the income side of your long-term diversified portfolio. That’s one of the options strategies I’ll be using in my forthcoming stock advisory newsletter, The Liberty Portfolio.
By selling a contract for someone else to buy your stock from you at a given price on or before a certain date, you earn money known as a premium.
You keep the premium and hope the stock ends up below that contracted price, known as the strike price. You can augment your income using covered calls, and here’s how you can earn $1,000 over the next month using covered calls.
Covered Calls: Microsoft (MSFT)
Microsoft Corporation (NASDAQ:MSFT) actually fell off my radar for a long time when the company was labeled and monopoly and Bill Gates retired.
That was a mistake, because it has transitioned into a different company over the ensuring period. MSFT stock has actually done rather well over the past 15 years or so. As covered calls go, it offers both volatility for decent premiums and safety as a long-term hold.
I mention safety because I want to hold stocks for the long term, and if they aren’t called away, I’m happy to hold them. Covered calls that have volatility to earn a 1.5% premium over a month or six weeks is a nice safe sweet spot.
Microsoft stock closed Wednesday at $59.43. The Dec. 16 $60 covered calls are selling for $1.15. That’s about 1.9%, which I consider fine for MSFT stock. Thus, if you sell four of these, you’ll collect $460.
Covered Calls: AT&T (T)
I’ve come to believe that even the least exciting stocks can serve a purpose in one’s portfolio. AT&T Inc. (NYSE:T) is making waves in that it appears to be making big moves into media. It purchased DirectTV, and now is going after Time Warner Inc (NYSE:TWX).
As a stock to hold for the long term, I don’t know how much you’d see from a capital gains standpoint, but it does have a solid dividend that can be augmented with covered calls.
It closed Wednesday at $36.37. The Dec. 9 $36.50 covered calls are sell for 80 cents. That’s actually much higher, at 2.2%, than I usually see its premiums, largely because of the volatility associated with its TWX stock bid.
So if you sell four of these, you’ll generate another $320, or $780 in total. By the way, you can also enjoy 5.3% yield during the year, as it pays out dividends.
Covered Calls: Nike (NKE)
I’ve also learned never to count out Nike Inc (NYSE:NKE), which also fell off my radar around the same time as MSFT. I just didn’t think it could remain the big name it was given all the competition in the sports clothing and shoes world. I was wrong. It is still a major player with great long-term potential.
Arguably, it’s a decent time to buy NKE stock since it is about 27% off its 52-week high.
NKE stock closed at $49.72 on Wednesday, which makes the $55 strike the most natural choice here. The Dec $50 covered calls are selling for about $1.35.
That’s a rather decent return of 2.4% for a 45-day holding period. If you sell two of these, you’ll generate another $270 and hit our target with a grand total of $1,050.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
