Newmont stock is rallying again following rising gold prices on the back of the Israel-Iran conflict. With the stock rising, the annualized dividend yield is dropping. But smart investors can increase the yield through a covered call strategy.
Newmont stock recently received an upgrade in its Relative Strength Rating to above 90 and the stock continues to put in higher lows and higher highs.
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 Newmont stock might take shape.
Mechanics Of The Covered Call
Buying a 100-share contract of Newmont stock would cost around $5,790, based on recent action. A Sept. 19-expiring call option with a 60 strike price traded around $3.75, generating $375 in premium per 100-share contract. Selling the call option generates an income of 6.9% in around three months, equaling around 26.3% annualized.
If Newmont stock closes above 60 on the expiration date, the shares will be called away at 60, leaving the trader with a total profit of $585. That's the gain on the shares plus the $375 option premium received. It equates to a 10.8% return, which is 41.08% on an annualized basis.
Of course, the risk with the trade is that Newmont 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.
Ratings For Newmont Stock
According to IBD Stock Checkup, Newmont stock ranks No. 15 in its group and has a Composite Rating of 98, an EPS Rating of 89 and a Relative Strength Rating of 91. An ideal score for each of these categories is 99.
Newmont is due to report earnings in mid-to-late July, so this trade would have earnings exposure if held to expiration.
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, 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.
