The stock market is, at the moment, at its third most expensive in history. The 1999-2000 dot-com bubble and 1929 crash were periods when the market was more expensive, but that’s it. To me, the market as a whole is significantly overvalued. That means many of the stocks that help form the major indices are overvalued as well.
Long-term diversified investors need not be concerned with this, assuming “long term” truly means at least 15 years, such as those interested in my stock advisory newsletter, The Liberty Portfolio.
Another strategy The Liberty Portfolio uses is to sell covered calls against stock, which is a great way to not only generate income, but to hedge a little of the inevitable downside. Sure, these stocks could get called away, but I frankly don’t think you’re missing much short-to-medium term upside.
The market may keep going up, but I believe it will revisit these levels (and lower) down the line.
Covered Calls for Options Income: Apple (AAPL)
Apple Inc. (NASDAQ:AAPL) has been on fire for several months, as AAPL stock has reached new all-time highs. With a massive cash hoard, a possible repatriation tax holiday and slowly expanding new areas for revenue, investors have enjoyed good times with AAPL stock.
Still, at Wednesday’s closing price of $153.26, I think AAPL stock is a great stock to sell covered calls against. You can even reach out into July to earn a decent premium. For example, the 21 July $155 covered calls are selling for $3.71. This is a 3.4% return for a holding period of 72 days, or about 17% annualized.
I would sell one of these for $371 in income. You’ll also have a $1.74 buffer as far as the closing price this week and the strike price for the covered calls.
Covered Calls for Options Income: Southwest Airlines (LUV)
Southwest Airlines Co (NYSE:LUV) remains the premier airline stock, in my opinion. I say that not only because LUV stock’s financials remain the best of any airline, but because I know that Southwest would fall over itself to avoid giving anyone a beatdown if they refused to get off a plane. In fact, they’d probably try to entice them off using chocolate.
Besides this, Southwest recently put a whole new reservation system in place and it was long overdue. Despite its most recent earnings report resulting in a lousy quarter, the market still loves LUV, sending it to just under $60 per share. The $500 million of savings that may result over the next few years from this new reservation system didn’t hurt, either.
LUV closed Wednesday at $58.37, near an all-time high. The 23 June $58 call is selling for $2. So if you subtract the 37 cents in capital losses you’d have if the stock is called away, you still end up with a very generous 2.8% return. Sell two of these for $400, bringing your total to $771.
Covered Calls for Options Income: Whole Foods (WFM)
Whole Foods Market, Inc. (NYSE:WFM) just reported lousy earning and the company is going into turnaround mode. I don’t think the plan, as thus far described, is going to work.
Perhaps the plan will be changed. Regardless, paying 30 times earnings for a company with negative earnings growth is not a good idea. That’s a great reason, if you insist on holding the stock, that you sell covered calls against it.
WFM stock closed Wednesday at $36.25, and I think this price is totally unreasonable as far as a buy point. However, selling the 23 June $36.50 covered calls seems like the right move here.
First, that means you’ll get $1.92 per contract, or a 5.3% return, which is right in the area that I like. Second, if you sell two of them, you’ll pick up $384, bringing your total for the covered call sales to $1,155.
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.