We are headed into earnings period, which is usually not the time I like to sell covered calls. However, I don’t shy away from these situations either. One of the strategies of covered calls is that you own a stock that you like, and if it does get called away, you still own in and make some money from the premium. If it does get called away, you can always buy it back.
Covered calls are what are known as an options trade. You purchase a stock, and you will sell the right but not the obligation to an investor to purchase that stock from you at a certain strike price on or before a certain expiration date.
In exchange for this right to purchase the stock from you, you are handed a premium.
Here are stocks that I think have a chance of disappointing the market and may have a slightly better chance of not getting called away.
Selling Calls: Exxon (XOM)
Exxon Mobil Corporation (NYSE:XOM) is a world-class energy stock is that is still about 20% below its all-time high, closing Wednesday at $82.50.
Although the oil sector has been recovering for quite some time, XOM stock has not quite returned to its former glory. Still, I think of it as a possible central holding in any long-term diversified portfolio.
If I am going to sell covered calls before earnings for a blue-chip stock, I want to sell the covered calls a few weeks past earnings reporting day. That gives the stock a chance to stabilize.
XOM stock reports on Oct. 27, so consider selling the 24 Nov $82.50 covered calls are selling for $1.37, for a 1.55% return. If you sell three of these, you’ll collect $411 total. Remember, there is a chance that XOM stock gets called away. If that happens, you may want to buy back the covered calls or buy back the stock.
Selling Calls: Facebook (FB)
Aggressive investors may already own Facebook Inc (NASDAQ:FB). Since it is always a volatile stock, it has very generous premiums. Just be careful because those premiums can be very tempting.
However, you don’t want to gobble up a big premium and have FB stock either rise or fall a lot unless you intend to stay long, or if you are hoping it gets called away because you want to book profits.
Facebook stock closed at $172.74 on Wednesday. It reports earnings on Nov. 1. Consider selling the 10 Nov $175 for $4.60. That not only gives you leeway on the upside, but if it gets called away, you’ll pick up an additional 1.5% on top of the 2.7% options premium for selling the covered calls.
By selling just one of these, you’ll book another $460. Added to the XOM trade, you’ll have a total of $871.
Selling Calls: Visa (V)
That brings us to our final stock, and we can be a little more conservative. Take a look at Visa Inc (NYSE:V). Now I love owning a part of an oligopoly, especially when Visa owns about 60% of the entire market for credit card transactions. It’s a terrific company although I feel it is, like FB stock, overpriced. So having it called away now via covered calls is not a bad thing.
Visa reports earnings on Oct. 25. It tends to be volatile for just a few days beyond its report, so you can sell a near-term covered call against the stock.
Visa stock closed at $108.44 on Wednesday. If you look at the 3 Nov $109 covered calls, you can sell just one for $2.05, and earn $205. That’s a very generous return of almost 2% for just a 24-day holding period, which earns out to 30% annualized.
By earning that $205, you have now sold $1,076 worth of covered calls.
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].