AstraZeneca is a group leader that is showing an improving Relative Strength Rating. So, let's look at how a covered call trade on AZN stock might take shape.
Income investors can further enhance the yield on the stock through the use of covered calls.
AZN stock is up 16.7% over the last three months compared to the S&P 500, down 1.4%.
AZN Stock Today
Buying 100 shares of AZN would cost around $7,470, based on Wednesday's midday trading. Meanwhile, a June 16-expiration 75-strike call option was trading recently around $1.90, generating $190 in premium per contract.
Selling the call option generates an income of 2.7% in just over one month, equaling around 21% annualized. That is in addition to the 1.9% annual dividend yield.
If AZN closes above 75 on the expiration date, the shares will be called away at 75, leaving the trader with a total profit of $220 (gain on the shares plus the $190 option premium received).
That equates to a 4.46% return, which is 36% on an annualized basis.
Risk Vs. Reward
Of course, the risk with the trade is that AZN stock might drop, which could wipe out any gains made from selling the call.
Investors looking to increase their income can use covered calls and cash secured puts on high dividend stocks.
According to IBD Stock Checkup, AZN stock ranks No. 1 in its group and has a Composite Rating of 89, an EPS Rating of 74 and a Relative Strength Rating of 90. The megacap stock has a value of $232 billion and almost 3.1 billion shares outstanding.
Mutual funds owning shares in AZN rose to 983 funds at the end of the first quarter vs. 888 a year earlier. Fidelity Contrafund (FCNTX) and Franklin Growth Fund (FKGRX) own positions.
Please remember that options are risky, and investors can lose 100% of their investment.
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 setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
