With the Trump administration rattling the saber regarding North Korea, blasting Syria with Tomahawk missiles and dropping the “mother of all bombs” on Isis, it’s worth looking at stocks involving national defense. I also think the market is overvalued, however, so selling covered calls against these stocks is a way to straddle both bullish and bearish views.
When selling covered calls, you are selling the right for another investor to buy a stock you own at or above a certain strike price on or before a certain contract expiration date.
The risk with covered calls is that the stock you own gets called away if the stock rises past your strike price, which means you have potentially lost out on some gains.
You can let the stock be called away, buy back the call, or just buy back the stock. If you buy the call for less than you sold it for, you still come out ahead. The same is true if you buy more stock before expiration at the strike price plus whatever premium you received.
Covered Calls: Raytheon Company (RTN)
Raytheon Company (NYSE:RTN) is trading near its all-time high of $157.59, with Wednesday’s close of $152.88. RTN stock is a $45 billion defense contractor, operating after a period of political weakness in which it did just fine, and entering a period with a president who is strong on defense.
Raytheon operates across the broad spectrum of defense: integrated defense systems; intelligence, information and services; missile systems; space and airborne systems; and Forcepoint. It serves the Department of Defense, the Intelligence Services, the armed forces, the Federal Aviation Administration, the Department of Homeland Security, NASA, and has plenty of international customers.
RTN stock isn’t terribly volatile, so premiums are not lucrative. To me, that’s not the point. I’m looking for a modest premium to generate a little cash and hedge a little on the downside
The 18 Aug $155 covered calls sell for $5, which is not only a 3.1% return, but if called away, you get another 1.5% in capital gains.
Covered Calls: Boeing Co (BA)
Most people think that Boeing Co (NYSE:BA) is just an airplane company that makes planes for tourists to take vacations. That’s not at all true. 64% of Boeing’s Defense, Space & Security division’s revenues come from the DoD. You also know plenty of those cool military planes and helicopters: the F/A-18 Super Hornet, the F-15, Chinook and Apache helicopters, and the V-22 Osprey.
And that’s just a part of what Boeing does. When you combine its military business with its space and passenger airplane business, you have a nicely diversified company.
BA stock closed Wednesday at $178.40, and the higher absolute price offers nice higher absolute premiums, even if the percent return isn’t super-attractive for shorter-term covered calls.
The 18 Aug $180 covered calls can be sold for $6.65. That’s 3.67%, and if called away, add in another $1.60 in capital gains. One contract netting $785 is just fine by me.
Covered Calls: Microsoft Corporation (MSFT)
Microsoft Corporation (NASDAQ:MSFT) may not be the guy in the missile silo that launches the nukes, but I like MSFT in general as a play on covered calls and because it is used a lot throughout the defense sector as far as an operating system.
MSFT certainly isn’t the company it once was, and that’s another reason to consider trading covered calls. It’s a great company, diversified, with fantastic cash flow and financials. You could buy the stock, sell covered calls repeatedly and whether called away or not, you can turn around and roll the option play month after month. It also pays a nice dividend to supplement any money you make holding the stock while still having sold covered calls.
MSFT stock closed Wednesday at $65. You can sell the 16 June $65 covered calls for $1.95. That is exactly 3%, and for a shorter period than the other stocks.
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 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.