In the current market environment, investors might be more interested in generating income rather than capital gains.
Today, we’re looking at two covered call examples on United Parcel Service (UPS) stock. The first step to finding our covered call candidates is to use the Stock Scanner with the following parameters:
Which produces the following results:
UPS is up 7.62% in the last three months and is currently showing a dividend yield of 3.35%. The stock also has a high IV Percentile which means options are expensive compared to the recent past.
Using options, we can generate an additional income from high yielding stocks via a covered call strategy.
UPS Covered Call Example
Let’s look at two different covered call examples on UPS stock. The first will use the April expiration and the second will use a five-month expiration.
Let’s evaluate the first UPS covered call example.
Buying 100 shares of UPS would cost around $19,800. The April 21, 195 strike call option was trading yesterday around $1.60, generating $160 in premium per contract for covered call sellers.
Selling the call option generates an income of 0.85% in 16 days, equalling around 18.16% annualized. That assumes the stock stays exactly where it is. What if the stock rises above the strike price of 195?
If UPS closes above 195 on the expiration date, the shares will be called away at 195, leaving the trader with a total profit of $580 (gain on the shares plus the $160 option premium received). That equates to a 3.07% return, which is 65.82% on an annualized basis.
Instead of the April 21 call, let’s look at selling the October 195 call instead.
Selling the October 195 call option for $12.65 generates an income of 7.10% in 198 days, equalling around 13.02% annualized.
If UPS closes above 195 on the expiration date, the shares will be called away at 195, leaving the trader with a total profit of $1,685 (gain on the shares plus the $1,265 option premium received).
That equates to a 9.46% return, which is 17.35% on an annualized basis.
These figures don’t include any potential dividends received during the course of the trades.
Of course, the risk with the trade is that the UPS might drop, which could wipe out any gains made from selling the call.
Barchart Technical Opinion
The Barchart Technical Opinion rating is a 100% 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 31.54% compared to a 12-month low of 20.57% and a 12-month high of 48.02%.
The next earnings release is set for April 25th.
Company Description
United Parcel Service is the world's largest express carrier and package delivery company. The company provides specialized transportation and logistics services in the United States and internationally. UPS offers a range of supply chain solutions, such as, freight forwarding, customs brokerage, fulfillment, returns, financial transactions, and repairs. UPS transports millions of packages each business day across the globe. UPS operates a ground fleet of multiple vehicles in the United States. The company has a ground fleet of package cars, vans, tractors and motorcycles across the globe. The U.S. domestic package operations involve ground delivery services, deferred air delivery, and next day air services. Opeartions include the time-definited delivery of letters, documents and packages throughout the country. The International package operations encompass delivery of letters, documents and packages worldwide, including shipments outside the U.S.
Of the 21 analysts following the stock, 11 rate it as a Strong Buy, 8 have a Hold rating and 2 have a Strong Sell rating.
Covered calls can be a great way to generate some extra income from your core portfolio holdings.
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.
