In an era of ultralow interest rates, the search for yield has become even more crucial.
The current yield on the S&P 500 is hovering at an anemic 1.3%, hardly ideal for investors who rely on yield.
So, how can we find an appropriate yield in the current environment? Savvy investors can enhance their yield on stocks such as Microsoft by using a covered call strategy.
A covered call involves buying 100 shares of the underlying stock and simultaneously selling a call option against those shares.
Selling the calls limits the upside but increases the yield from the investment in the form of option premium.
The investor keeps the premium generated from selling calls no matter what happens with the stock.
Microsoft stock has long been a bellwether, and that trend continues with six green check marks on the IBD stock checklist.
When trading covered calls, most investors sell monthly calls against their stock to make the most of the effects of time decay. That makes a lot of sense but also requires a lot of active management.
So, what if we sold yearly covered calls against Microsoft stock? Let's take a look.
Microsoft Stock Yearly Covered Call
On MSFT stock, a June 2022 expiring call option with a 290 strike price can currently be sold for around $25, generating $2,500 in premium per contract.
Purchasing 100 shares of Microsoft stock will cost around $28,880, but the net cost can be reduced by the $2,500 option premium received.
Therefore, we have a potential return of 9.476 (2,500/26,380) in 324 days (what's left until the June 2022 expiration), which is 10.68% at an annualized rate (extending the return to 365 days).
That sure beats the dividend yield on most stocks in the current market and is certainly a whole lot better than the current Microsoft stock yield of 0.77%.
Covered calls are a fantastic way to generate extra income from a stockholding while also providing some downside protection.
Investors would need to weigh the pros and cons of the stock before initiating a bullish trade like a covered call.
Microsoft shares rose Wednesday after the company beat profit expectations late Tuesday.
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.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setup is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
