Covered calls are a great strategy to add to any portfolio, particularly in this era of low yields. Covered calls 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 811 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 DELL, NEM, PDD, WMT, MRK and KMB.
DELL Covered Call Example
Let’s evaluate the first line item, a covered call on DELL. Buying 100 shares of DELL would cost $14,506.
The September $155-strike call option was trading on Friday around $12.60, generating $1,260 in premium per contract for covered call sellers.
Selling the call option generates an income of 9.51% in 89 days, equalling around 39.01% annualized.
If the stock rises above the strike price of $155 at expiration, the return would be 17.4% which is 70.4% annualized.
The breakeven price is equal to the stock purchase price less the premium received, which in this case is $132.46.
DELL is currently followed by 16 analysts with 12 Strong Buy ratings, 2 Moderate Buy rating, 1 Hold rating and 1 Strong Sell rating.
The Barchart Technical Opinion rating is a 100% Buy with a Average short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
The current IV Percentile is 86% which means that the current level of implied volatility is higher than only 86% 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 $4,226. The August $45-strike call option was trading on Friday around $1.27, generating $127 in premium per contract for covered call sellers.
Selling the call option generates an income of 3.1% in 54 days, equalling around 20.94% annualized.
If the stock rises above the strike price of $45 at expiration, the return would be 9.8% which is 64.9% annualized.
The breakeven price is $40.99.
NEM is currently followed by 15 analysts with 7 Strong Buy ratings, 1 Moderate Buy rating and 7 Hold ratings.
The Barchart Technical Opinion rating is an 88% Buy with a strengthening short term outlook on maintaining the current direction.
The current IV Percentile is 53% which means that the current level of implied volatility is higher than just 53% 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.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
