We are about to flip over to a new month, so why not $1,000 in options premium income via covered calls? My stock advisory newsletter aims to generate $1,000 per month in options plays in order to generate income for investors interested in that extra cash.
$1,000 is arbitrary. Investors may always generate income from options premium. I mention $1,000 because that’s about what I may generate based on the size of my current portfolio. To reach this same amount, investors probably require more than $50,000 in total holdings.
I prefer covered calls because I usually only will sell them on securities that I might desire to own, or don’t mind holding for a while. These are strong, world-class businesses that execute proudly and are increasing earnings. Should there be a market correction during such time I have calls sold against my position, I remain pleased to hold the stock. Meanwhile, I’ve hedged some of the downside by generating the dollars on the covered calls.
If my stock gets called away, I may miss out on some upside. However, I can always buy the stock back.
Covered Calls: Visa (V)
A longtime go-to play of mine is Visa Inc (NYSE:V). Visa is part of an oligopoly, and you are probably overlooking strong long-term performance without a position in a credit card company. With V stock being a massive company that grows earnings regularly and at a nice rate, and part of this oligopoly, you may already own it in your portfolio. Analysts see 18% earnings growth next year, and with $4 per share in earnings, V stock trades at 26x.
V stock trades at $103.75 as I write, and is thus right next to the $104 strike price. If you sell the 6 Oct $104 covered calls, for $1.90, you’ll generate a return of about 1.88%. Over the next 37 trading days then, it comes out to an 18% annualized return.
Also, this gets investors out of the options trade before the quarterly report so as to avoid any ugly earnings misses.
Two contracts yields investors $380 in income.
Covered Calls: Apple (AAPL)
Apple Inc. (NASDAQ:AAPL) has had a very strong run this year, and I think now may be the time for a covered calls play. This is not to say that AAPL stock cannot run higher. It can. However, now seems about the time for it to take a pause.
AAPL stock trades at $163.68. There isn’t a nearby strike price for covered calls, which is a bit strange since I would expect them to be at every dollar. But that’s fine. With strike prices every $2.50 apart, there is another good play here.
Consider the 6 Oct $165 covered calls. First of all, you have $1.32 in additional price increase before having the risk of the stock being called away. In the meantime, you can sell one covered call for $4.05. This is a generous return of 2.45% for a 37-day holding period, or about 24% annualized.
One covered call gets investors $405, which brings investors to a total of $785.
Covered Calls: Disney (DIS)
Walt Disney Co (NYSE:DIS) has been struggling as of late because of the never-ending ESPN debacle. DIS also just announced huge cuts the ABC TV division. That’s 300 jobs going into the toilet. I don’t see this as a positive in the near-term for Disney. Still, DIS stock remains the diversified entertainment stock to own for the very long term, not the least because of its ownership position in the massive revenue generators of Marvel, Pixar and Lucasfilm.
Despite the recent struggles, DIS stock remains compelling with its great properties and cash flow.
DIS stock trades at $102.87. The 6 Oct $103 covered calls sell for $2.15, which would bring investors to exactly $1,000 in covered call premiums. It is also a 2.2% return or 21% annualized. There is also that tiny 13 cents in capital gains if the stock gets called away. If things should suddenly improve at DIS, you can always buy back the covered calls or buy the stock back if called away.
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].