Covered calls are options trades that have a lot of utility. They can generate additional monthly income, which is how I utilize them in my stock advisory newsletter, The Liberty Portfolio. They can also be used to hedge long positions.
However, in some cases, they can also be used as both — to generate income and to hedge the downside a little. We have scenarios going on right now for which these covered call strategies will be perfect.
Covered calls are contracts in which you own an underlying stock, and you sell contracts for 100 shares each that give another investor the right to buy the stock from you at a particular price on or before a given contract expiration date. You get paid a premium for selling the contract.
If the stock trades above that price, you are obligated to either sell the stock or buy back the calls. If the stock trades below that price, you keep the stock and premium.
Covered Calls: Disney (DIS)
Walt Disney Co (NYSE:DIS) reported earnings that were okay, but not great. The stock fell about 5% on the news and closed Wednesday at $102.83.
I consider DIS stock to be one of those stock to hold for a very long time. Despite troubles at ESPN, the fact is that Disney will be part of the human entertainment experience for a long time. So for those who own the stock and are holding it, DIS is dead money for a while. It will probably be dead money until at least the next earnings report, or longer, since the market is overvalued.
Thus, you may want to consider selling the Oct $105 covered calls for $2.10. That’s about a 2.1% return, and you have a $2.17 buffer before hitting the strike price.
Covered Calls: Alphabet (GOOG, GOOGL)
Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) disappointed investors with its last earnings report. Frankly, there wasn’t too much to be upset about, but when a stock gets extended, it doesn’t take much for the market to turn on it. GOOGL stock fell about 6% and closed Wednesday at $940.08 per share.
You have a few covered calls that you can sell here if you plan on holding GOOGL stock for the long term.
The 20 Oct $940 covered calls are offering a whopping premium of $28. So if you have 100 shares of GOOGL stock amounting to $94,000 worth, you can sell one contract and make $2,800. GOOGL could, of course, soar back above $971 per share, forcing you to either buy back the call or miss some upside.
Or you could sell the Sept $940 covered calls and still make $17.50 on the contract. That’s an excellent return of 1.9% for about five weeks.
Covered Calls: Teva Pharmaceutical (TEVA)
Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) has just been hammered with bad news lately. TEVA remains the largest generics drug producer in the world and has its own pipeline of drugs, but the news has just been terrible on several fronts.
It was also a large holding in many portfolios because it had reliable cash flow and a solid dividend. Now, many investors may be thinking of selling. I don’t know if that’s the right move or not, but they may want to consider the alternative of selling covered calls to bring in some income against some of the recent losses.
TEVA stock closed at $17.50 on Wednesday. The Nov $17.50 covered calls are selling for $2.04. That’s incredible — it’s an 11.7% return for three months holding period — which is unheard of. It will help you claw back some of your losses thus far, assuming you are not planning to sell out of your position.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own 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 [email protected].