With markets becoming increasingly volatile, investors might be more interested in generating income rather than capital gains.
Bank stock yields are reasonable at present, and 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 $15,329. The December 8, $155 strike call option was trading yesterday around $1.44, generating $144 in premium per contract for covered call sellers.
Selling the call option generates an income of 0.95% in 17 days, equalling around 19.23% annualized.
That assumes the stock stays exactly where it is. What if the stock rises above the strike price of $155?
If JPM closes above $155 on the expiration date, the shares will be called away at $155, leaving the trader with a total profit of $315 (gain on the shares plus the $144 option premium received). That equates to a 2.1% return, which is 44.5% 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 December 8 $155 call, let’s look at the January 19 $170 call. Selling the $170 call option for $0.32 generates an income of 0.21% in 59 days, equalling around 1.27% annualized.
If JPM closes above $170 on the expiration date, the shares will be called away at $170, leaving the trader with a total profit of $1,703 (gain on the shares plus the $32 option premium received).
That equates to a 11.1% return, which is 68.9% 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 56% Buy with a Strengthening short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
Implied volatility is at 16.25% compared to a 12-month low of 16.25% and a 12-month high of 41.08%. Some traders may prefer implied volatility to be higher before starting a covered call trade.
Bank stocks are a common component of most investment portfolio and now you know how to generate an income from your JPM position now.
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.
