Covered calls are a great strategy to add to any portfolio, and can offer enhanced yield from stock holdings, in some case, that can be a significant increase.
To trade a covered call we need to own (or buy) 100 shares of a stock and then sell a call option against that stock position.
The goal is to generate income from the stock holding in addition to any dividends. The premium received from selling the call also covers a small decline in the stock price. However, the trade off is that stock gains are limited above the call option strike price.
High volatility stocks have the highest return potential with covered calls, but they also have the highest risk of an adverse price movement. It’s all about finding a strategy that fits the investors risk tolerance.
Let’s look at a few examples using Barchart’s Covered Call Screener.
This first example shows the results of the screener with the default parameters selected.
This result returns some stocks with very low market capitalization and, while the returns look great, the risks can also be very high. There are also 522 results, so let’s try and narrow things down a little
Let’s add the following filters:
Now, we’re seeing some more mainstream names such as NEM, CVS, CSCO, SCHW and WMT.
WMT Covered Call Example
Let’s evaluate the first WMT covered call. Buying 100 shares of WMT would cost $9,709.
The September $105-strike call option was trading yesterday for around $1.54, generating $154 in premium per contract for covered call sellers.
Selling the call option generates an income of 1.6% in 73 days, equalling around 8.0% annualized.
If the stock rises above the strike price of $105 at expiration, the return would be 10.1% which is 50.7% annualized.
The breakeven price is equal to the stock purchase price less the premium received, which in this case is $95.55.
WMT is currently followed by 36 analysts with 29 Strong Buy ratings, 6 Moderate Buy ratings and 8 Hold ratings.
The Barchart Technical Opinion rating is a 72% Buy with a Weakening short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
The market is approaching overbought territory. Be watchful of a trend reversal.
The current IV Percentile is 32% which means that the current level of implied volatility is higher than only 32% of all occurrences in the last 12 months.
NEM Covered Call Example
Let’s look at another example, this time using NEM.
Buying 100 shares of NEM would cost $5,761. The September $62.50-strike call option was trading yesterday for around $1.90, generating $190 in premium per contract for covered call sellers.
Selling the call option generates an income of 3.4% in 73 days, equalling around 17.1% annualized.
If the stock rises above the strike price of $62.50 at expiration, the return would be 12.2% which is 60.9% annualized.
The breakeven price is $55.71.
NEM is currently followed by 20 analysts with 12 Strong Buy ratings, 1 Moderate Buy rating, 6 Hold ratings and 1 Moderate Sell rating.
The Barchart Technical Opinion rating is an 88% Buy with an Average short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
The current IV Percentile is 80% which means that the current level of implied volatility is higher than just 80% of all occurrences in the last 12 months.
Please remember that options are risky, and investors can lose 100% of their investment. This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
