Investors desirous of new ways to generate income should think about covered calls — it is a primary strategy of The Liberty Portfolio, my stock advisory newsletter that aims to generate $1,000 in options income for subscribers every single month. Although the stocks in this column are very different from those I select in The Liberty Portfolio, they are stocks that I think most long-term diversified portfolios should seriously consider having. With covered calls, then, if the stock is not called away, then we would not mind. It just means we generated additional income.
Although the stocks in this column are very different from those I select in The Liberty Portfolio, they are stocks that I think most long-term diversified portfolios should seriously consider having. With covered calls, then, if the stock is not called away, then we would not mind. It just means we generated additional income.
So if the strategy works as designed, you do hold the stock; but at expiration, the share price is close to the same strike price at which you originally sold the covered calls. Then you repeat and sell calls again. Now, should the stock experience a big loss before expiration, you’re stuck holding it. But you shouldn’t mind — after all, the idea is that you’re targeting stocks that you hope will one day exceed the price you purchased them at.
Here are three stocks and covered calls that, all together, will generate $1,000 in income for you.
Covered Calls: Berkshire Hathaway (BRK.B) Stock
Berkshire Hathaway Inc. (NYSE:BRK.B) is obviously the granddaddy of all stocks. I don’t see how a long-term investor of any seriousness does not own BRK stock. Hey, even if you haven’t purchased BRK stock yet, maybe you can buy it here and sell covered calls. The great thing about BRK stock is that, no matter what happens to the market, BRK stock will claw its way back over time.
Hey, even if you haven’t purchased BRK stock yet, maybe you can buy it here and sell covered calls. The great thing about BRK stock is that, no matter what happens to the market, BRK stock will claw its way back over time.
Now, BRK.B stock closed Wednesday at $183.82, a 52-week high. I would sell two 27 Oct $185 covered calls for $2.18 each, for a total of $436. That represents only a 1.2% return, but that’s reasonable for a great stock on a 5-week holding period, so we don’t expect a large premium. That is also part of the strategy, in that BRK stock is a safer play.
You also might earn another $1.18, or 0.65% if the stock does get called away.
Covered Calls: Raytheon (RTN) Stock
One of the other great American stocks, in a sector that will remain strong for some time, is Raytheon Co. (NYSE:RTN).
I love most any stock in the aerospace/defense sector because our country will always require big money to be spent on defense. Defense is essentially an oligopoly, given the dominance on display by just a few companies. RTN is a long-time winner.
RTN stock closed at $184.80 on Wednesday, not all that different from Berkshire. So we will look to sell covered calls against the $185 strike price, but we will do so for the 17 Nov covered calls.
If you sell one of the 17 Nov $185 covered calls for $4.55, and the stock should be called away, you will make $4.75 per contract, or $475 total. As it is, nothing to complain about.
However, if RTN stock is not called away, you get the premium and keep the stock. That $455 means a return of 2.45% for just a 9-week holding period.
Covered Calls: AT&T (T) Stock
While most investors probably don’t see AT&T Inc. (NYSE:T) as a mega-growth stock, the thing about T stock that has always been true, and still will be true after the Time Warner Corporation (NYSE:TWX) merger, is that it will be a cash flow machine.
That means there are literally tens of billions to pay it’s healthy 5%-plus dividend with. You can even pile on more money on top of that with covered calls.
So with T stock at $38.43, you can sell the 17 Oct $39 covered calls for 57 cents each. That’s a 1.5% return right there, plus another 0.5% if called away. If you sell two of these, you’ll earn a total of $114. Combined with the other trades, you’ll net out at $1,003.
By the way, these three stocks are also from different sectors, so you have a little built-in diversity to boot.
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 TheLibertyPortfolio@gmail.com.
