Enbridge stock has broken out past a key buy point and offers a compelling 5.7% dividend yield backed by strong fundamentals and consistent cash flow.
The Canadian pipeline giant is outpacing the S&P 500 on a year-to-date basis with a 13.9% rise, compared with a rise of 10.7% on the benchmark index.
Income investors may want to further enhance the attractive dividend yield through the use of covered calls.
A covered call strategy is one way to slightly reduce the risk on a long stock position while also generating some option premium. The catch is that upside is limited above the covered call strike.
Let's look at how a covered call trade on Enbridge might take shape.
Particulars On The Covered Call
Buying a contract of 100 shares of Enbridge would cost around $4,830. A Jan. 16, 50-strike call option is trading around $1.05, generating $105 in premium per contract. Meanwhile, selling the call option generates an income of 2.2% in four months, equaling around 6.2% annualized.
If Enbridge stock closes above 50 on the expiration date, the shares will be called away at 50, leaving the trader with a total profit of $275. That's the gain on the shares plus the $105 option premium received. Further, it equates to a 5.8% return, which is 16.3% on an annualized basis.
Of course, the risk with the trade is that Enbridge stock might drop, which could wipe out any gains made from selling the call.
Covered calls can be an effective strategy for generating income, managing downside risk, and reducing the effective purchase price of a stock.
Where Enbridge Stock Ranks
Investor's Business Daily gives Enbridge stock a Composite Rating of 92, an Earnings Per Share Rating of 84 and a Relative Strength Rating of 79. Enbridge also ranks third in its group, according to IBD Stock Checkup.
Operating one of North America's largest energy networks, Enbridge benefits from inflation-linked, fee-based contracts that shield it from commodity price swings.
With low implied volatility and a $30 billion project backlog, the stock offers both stability and growth potential. Its recent breakout and attractive entry point also make it a standout for income-focused investors.
Please remember that options are risky, and also that 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.
Gavin McMaster has a masters in applied finance and investment. He specializes in income trading using options, and is conservative in his style. He also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
