Ever dreamt of being a landlord but for your stock portfolio?
Welcome to the world of covered calls where you get to "rent out" your stocks.
It's where you call the shots, collect the rent, and grow your portfolio. You can think of each stock as a rent-generating apartment that can turn your portfolio into an income producing machine!
How Do Covered Calls Work?
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 tradeoff 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 877 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 INTC, CSCO, ORCL, IBM, and BSX.
INTC Covered Call Example
Let’s evaluate the first line item, a covered call on Intel. Buying 100 shares of INTC would cost $3,661.
The November 40-strike call option is trading around $1.22, generating $122 in premium per contract for covered call sellers.
Selling the call option generates an income of 3.45% in 73 days, equalling around 17% annualized. That’s a lot higher than a rental property!
The breakeven price is equal to the stock purchase price less the premium received, which in this case is 35.39.
INTC is currently followed by 32 analysts with 3 Strong Buy ratings, 3 Moderate Buy ratings, 21 Hold ratings,1 Moderate Sell and 4 Strong Sell ratings.
The Barchart Technical Opinion rating is a 96% Buy with a strongest short term outlook on maintaining the current direction.
The current IV Percentile is 4% which means that the current level of implied volatility is higher than just 4% of all occurrences in the last 12 months.
ORCL Covered Call Example
Let’s look at another example, this time using Oracle.
Buying 100 shares of ORCL would cost $12,093.
The October 130-strike call option is trading around $2.07, generating $207 in premium per contract for covered call sellers.
Selling the call option generates an income of 1.74% in 45 days, equalling around 14% annualized.
The breakeven price is 118.86.
ORCL is currently followed by 23 analysts with 10 Strong Buy ratings and 13 Hold ratings.
The Barchart Technical Opinion rating is an 88% Buy with an average short term outlook on maintaining the current direction.
The current IV Percentile is 75% which means that the current level of implied volatility is higher than 75% of all occurrences in the last 12 months.
Oracle is due to report earnings on September 11th.
Conclusion
Covered call selling has a lot of similarities with being a landlord. You can think of selling covered calls as “renting out” your stocks.
Covered calls offer flexibility and quick returns, while being a landlord brings real estate stability and long-term wealth potential. Your choice depends on your goals and lifestyle.
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.
