Using Options to Generate Extra Income from Financial Stocks

With the market climbing significantly lately, investors might be more focused on generating income rather than capital gains.

Financial stocks have typical paid reasonable dividends, but in this era, yields on bank shares are quite low.

Thankfully, as sophisticated investors, we can generate an additional income from holding banks stocks by using options. The strategy is a known as a covered call which involves selling call options against a stock position.

Let’s firstly check which bank stocks have a Buy Rating. To do this go to the Stock Screener and use these Parameters:

Then, sort by Industry. Looking at the table below, JP Morgan (JPM) is the main name that stands out, so let’s use that in our Covered Call Screener.

JPM Covered Call Example

When running the Covered Call Screener for JPM, we find the following results:

Let’s evaluate the first JPM covered call example. 

Buying 100 shares of JPM would cost $20,226. The August 16, $215 strike call option was trading on Friday around $1.54, generating $154 in premium per contract for covered call sellers. 

Selling the call option generates an income of 0.8% in 47 days, equalling around 5.96% annualized. 

That assumes the stock stays exactly where it is. What if the stock rises above the strike price of $215?

If JPM closes above $215 on the expiration date, the shares will be called away at $215, leaving the trader with a total profit of $1,428 (gain on the shares plus the $154 option premium received). That equates to a 7.7% return, which is 58.5% on an annualized basis.

That particular covered call allows for a bit of capital appreciation. What if an investor was more income focused? They would need to sell a call much closer to the stock price (look for a low value in the Moneyness column).

Instead of the August 16th $215 call, let’s look at the July 19th $207.50 call. Selling the $207.50 call option for $2.18 generates an income of 1.1% in 19 days, equalling around 20.9% annualized. 

If JPM closes above $207.50 on the expiration date, the shares will be called away at $207.50, leaving the trader with a total profit of $742 (gain on the shares plus the $218 option premium received).

That equates to a 4.3% return, which is 78.2% on an annualized basis.

Of course, the risk with the trade is that the JPM might drop, which could wipe out any gains made from selling the call.

Barchart Technical Opinion

The Barchart Technical Opinion rating is a 96% Buy with a Strengthening short term outlook on maintaining the current direction.

Long term indicators fully support a continuation of the trend.

The market is approaching overbought territory. Be watchful of a trend reversal.

Implied volatility is at 22.41% compared to a 12-month low of 15.00% and a 12-month high of 28.16%. 

Financial stocks are a common component of most investment portfolios and now you know how to generate an income from your JPM position.

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.