Royal Caribbean Group is currently sitting at No. 26 on the IBD 50. Plus, Royal Caribbean stock is showing improving relative strength. While RCL currently does not pay a dividend, savvy investors can still create a yield from RCL using covered calls.
According to IBD Stock Checkup, RCL stock ranks No. 2 in its group and has a Composite Rating of 92, an EPS Rating of 67 and a Relative Strength Rating of 96.
Royal Caribbean Stock Today
A covered call involves buying 100 shares of the underlying stock and simultaneously selling a call option against those shares. Selling the call option limits the upside but it increases the yield from the investment in the form of option premium received.
The investor keeps the premium generated from selling calls no matter what happens with Royal Caribbean stock or any other equity investment.
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 RCL stock? Let's take a look.
A Covered Call That Expires In June 2024
On Royal Caribbean stock, you could have recently sold a June 21, 2024-expiring call option with a strike price of 90 for around $12.50. This generates $1,250 in premium per contract. Purchasing 100 shares of Royal Caribbean stock will cost around $8,000. But the net cost can be reduced by the $1,250 in option premium received.
Therefore, we have created a yield of 18.5% (1,250 divided by 6,750, multiplied by 100) in 387 days, or 17.4% annualized.
That sure beats the dividend yield on most stocks in the current market. Plus, it still allows for around $1,000 of capital appreciation.
Covered calls are a fantastic way to generate extra income from a stock holding while also providing some downside protection. Investors would need to weigh the pros and cons of the stock before initiating a bullish trade such as the one explained in Royal Caribbean stock.
Beyond RCL
The last trade like this we looked at was on Arista Networks and that worked out well.
This bull call spread trade on Nvidia also worked well and can be closed for a full profit.
Please remember that options are risky, and investors can lose 100% of their investment. 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 Twitter at @OptiontradinIQ
