You may think that, as an investor who is conservative or retired, that you have no reason to trade options. That’s not true. Selling covered calls are a fantastic way to generate money on a monthly basis to add to your income strategy. My stock advisory newsletter, The Liberty Portfolio, uses covered calls and their opposite (naked puts) to generate $1,000 each and every month.
Suppose you either currently own a blue-chip stock, and are buying it. You can utilize options to make a little more money off of them in exchange for selling earlier than you may want to, but you can always buy the stock back.
With covered calls, you sell the right for another investor to buy a given stock from you at a certain price (strike price), on or before a specific day (expiration date).
You execute this contract because you believe this stock will not close above the strike price before expiration. If that does come to pass, and the stock does not close above that strike price before or on expiration, you the money (premium) you were paid for selling the contract, and the stock.
If the stock closes above the strike price at expiration, the stock will get “called away,” i.e. you’ll sell it, but keep the premium.
Covered Calls: McDonalds (MCD)
McDonald’s Corporation (NYSE:MCD) has engaged in a terrific turnaround, going from a struggling legacy business to a fresher version of itself. The Big Mac has been reinvented! Well, not just that but the whole menu, and MCD stock has done very well as a result.
So if you are buying here after its extended run, or if you own it, it’s possible that MCD may have topped out in the near term. So why not sell covered calls?
Should MCD stock get called away, you can certainly repurchase the stock. If it doesn’t get called away, and you hold the stock, I see very little wrong with owning this amazing company that will surely do well over the very long term.
MCD stock closed at $154.05 on Wednesday.
You could sell the 3 Nov $155 covered calls for $3. You get a 1.9% return which you keep it not called away. Sell two of these and earn $600.
Covered Calls: Boeing (BA)
Boeing Co (NYSE:BA) stock is terrific for selling covered calls because it belongs to an oligopoly. That is, it’s one of a small and select group of companies that not only makes airplanes but is involved in defense. The defense and aerospace sector is always a booming industry.
Thus, should you sell covered calls on BA stock and it is called away, you could choose to buy it back and hold. However, should you hold onto BA stock and the market crashes one day, you can buy even more. BA stock is a wonderful company.
Now, Boeing isn’t a terribly volatile stock, so its premiums aren’t massive, but you will earn enough to make selling covered calls worthwhile.
On Wednesday, BA stock closed at $255.28. The 3 Nov $267.50 covered calls are selling for $2.75, which is a 1.1% return. However, notice how the strike price is a full $12 above the current price. That means if BA stock is called away, you’ll earn an additional 5% on top. Sell one for $275.
Covered Calls: Berkshire (BRK)
Berkshire Hathaway Inc. (NYSE:BRK.B) is another blue chip stock that is a terrific long-term hold, and offers very modest premiums when it comes to selling covered calls. One of the reasons I like selling covered calls against BRK.B stock is that the stock doesn’t pay a dividend. Selling covered calls is a bit like generating your own personal dividend off the stock.
So, if BRK.B stock should get called away, you can repurchase it. You could even turn around and sell covered calls again. Over time, this strategy could pay very well, but remember that you may miss some upside depending on when the stock gets called away.
Wednesday ended with BRK.B stock at $183.27. You can sell the 3 Nov covered calls at the $185 strike for $1.90. If you sell one for $190, then the total for all three trades will be $1,065.
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.
