Prudential Financial offers an array of financial products and services, including life insurance, annuities, retirement-related services, mutual funds, investment management and real estate services.
Prudential stock has been a solid performer this year, with a 21.3% return so far.
The stock also has an above-average annualized dividend yield of 4.1% and was featured in the Income Investor column last week.
Investors who want to generate even further income could look at a covered call trade.
A covered call strategy is one way to slightly reduce the risk on a long stock position while also generating some premium. The catch is that upside is limited above the covered call strike.
Let's look at how a covered call trade on Prudential might take shape.
Buying 100 shares of Prudential would cost around $12,580, based on Tuesday's closing price.
A 5% Return In One Month
A Nov. 15, 130-strike call option traded around $2.15, generating $215 in premium per contract.
Selling the call option generates an income of 1.7% in just under one month, equaling around 20.47% annualized.
If Prudential closes above 130 on the expiration date, the shares will be called away at 130. That leaves the trader with a total profit of $632. (The gain on the shares plus the $215 option premium received.)
That equates to a 5.11% return, which is 60.17% on an annualized basis.
Of course, the risk with the trade is that Prudential stock might drop. And that could wipe out any gains made from selling the call.
Benefits Of A Covered Call
Covered calls can be an effective strategy for generating income, managing downside risk and reducing the effective purchase price of a stock.
According to the IBD Stock Checkup, Prudential stock is ranked No. 7 in its industry group. It has a Composite Rating of 80, an EPS Rating of 75 and a Relative Strength Rating of 73.
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 setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
