Covered calls can provide investors with two strategies when holding a long-term diversified portfolio, just like the one I am putting together for my stock advisory newsletter, The Liberty Portfolio.
They are a nice way to slightly hedge a portfolio. If you sell covered calls, you are giving up potential upside, but getting paid a premium for doing so, which may protect your downside a bit, depending on how far out you sell the calls.
The Liberty Portfolio also uses covered calls to generate $1,000 in monthly income, wrapped around the entire long-term portfolio building process. Here are some examples of the types of trades you may consider if you want to generate some additional monthly income.
Covered Calls: Microsoft Corporation (MSFT)
Microsoft Corporation (NASDAQ:MSFT) has come a long way since its days as a software company. It has expanded in numerous ways, and done so successfully. Interestingly, even though it is as consistent a company as can possibly exist, MSFT stock can still demonstrate enough volatility to make for high premiums if you are selling covered calls. If you put together a consistent company and its volatility, you get a fairly safe and reliable way to make some money selling covered calls.
I like to aim for a 2% return for a 4 – 6 week holding period.
MSFT stock closed Wednesday at $84.68. There are a few choices to sell covered calls here, on both strike price and expiration. If you sell the 22 Dec $85 covered calls for $1.40, you come out with a 1.7% return. You can sell four of these covered calls for $560.
Covered Calls: Starbucks Corporation (SBUX)
Starbucks Corporation (NASDAQ:SBUX) is going through a transition to a new kind of company. However, the underlying stock and company are in solid long-term shape, and like MSFT, SBUX stock provides a nice premium in most cases.
With Howard Schultz plotting a new growth strategy, SBUX continues to chug along. It isn’t explosive, but it is reliable, and the stock is in a nice trading range. Hopefully you’ll sell covered calls and make some money.
SBUX stock closed Wednesday at $57.91. There’s a great choice to be made by selling the 22 Dec $58 covered calls for $1.04. That’s a 1.8% return for a six week holding period, and that comes out to about 16% annualized.
If you sell two of these for $208, you’ll bring your total to $768.
Covered Calls: AT&T (T)
With all the attention on the merger of AT&T Inc. (NYSE:T), investors are also forgetting it’s just a simple little stock that still has a nice dividend payout. It does have plenty of free cash flow, although that cash flow is enough to cover the dividend, but it does so at a payout ratio of 90%. So there is reason, if you own T stock, to perhaps sell some covered calls as a hedge if the merger fails or if the dividend struggles going forward.
One thing for sure is there isn’t much growth to AT&T without that merger. So I don’t like T as a holding without the merger, and I’m concerned about that dividend without the merger going through.
AT&T stock closed Wednesday at $33.44. The 22 Dec $33.50 covered calls are selling for 80 cents. Sell three of these to bring your total sales of covered calls to $1,008.
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].