Do you hear that? It’s relative silence, as most of the big earnings reports have already come through for the quarter.
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That’s not really great news for the financial media, which has to quiet down or make molehills out of nothing for a few weeks. But it’s great news if you want to make some cash using covered calls.
Covered calls are an options strategy. You own a stock, and you sell the right to another investor to buy that stock from you at a given strike price on or before a given expiration date. In exchange for this right to buy the stock from you, you get paid a premium.
During the period in between earnings, stock volatility drops, and so do premiums — so your actual income-producing potential is a bit lower than normal.
However, it also means it’s less likely that a stock will rise above the strike price, meaning it’s more likely you’ll get to keep your stock, and the premium you were paid.
Here are three blue-chip stocks that are perfect for covered calls right now:
Covered Calls on Visa (V)
Visa Inc (V) is a great stock to use covered calls with. It’s a stock that anyone should be happy to have in their portfolio. It’s a serious growth stock, with EPS growing at 16% per year, and $9.5 billion in net cash on its balance sheet.
Of course, it’s also part of a very select few credit card processors.
V stock closed Wednesday at $79. You have a few options for covered calls. The first is to sell the July 15 $80 covered calls for $1.70. The base return is 2.1%. If the stock gets called away, you pick up a dollar in capital gain for a total return of 3.4%. That’s a 23% annualized return.
You could also sell the June 17 $79 covered calls for $1.37. In this case, you only pick up a 1.75% return (or 3% if called away), but if it isn’t called away, you could turn around and sell the July covered calls.
Covered Calls on Facebook (FB)
For more aggressive investors, think about selling covered calls against Facebook Inc (FB). It tends to be volatile all the time, offering higher premiums.
In a way, I like selling covered calls against FB stock rather than holding it for too long. It’s just too vulnerable to a big decline, so holding it for a short period and selling covered calls reduces risk.
Facebook stock closed at $117.89 on Wednesday. The June 24 $118 covered calls are selling for $2.87. That’s a 2.45% return for just a 30-day holding period, or 29% annualized, and is pretty generous.
You could play that, see what happens, and then sell the July calls. Or you could just sell the July 15 $120 covered calls for $2.95. There isn’t a closer strike than $120, but in this case, while you pick up the same 2.45% return, if FB gets called away, you get another $2.11 in capital gains. That’s a total return of 4.35% in returns.
Covered Calls on Exxon Mobil (XOM)
Exxon Mobil Corporation (XOM) may be down from its all time high, but it’s right at its 52-week high, closing Wednesday at $90.26. The oil patch has been suffering for quite some time, yet XOM stock has shown the most resilience. I regard it as a core holding in any long-term diversified portfolio.
Now, there’s always a risk that a stock gets called away and rockets skyward. If that happens, you “miss out” on the additional price increase. Some people want to avoid that risk, and that makes perfect sense.
That’s another reason why I like to sell covered calls before earnings for a given company, especially a blue chip. The risk of it being called away tends to be less.
With XOM stock, the June 24 $90.50 covered calls are selling for $1.31, for a 1.4% return. Or you could sell the July 15 $90 calls for $2.46, and collect a net of 2.45%
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com. As of this writing, he did not hold a position in any of the aforementioned securities.