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 Newmont Mining 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:
Newmont Mining (NEM) is up 29.63% in the last three months and is currently showing a dividend yield of 2.10%. 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.
NEM Covered Call Example
Let’s look at two different covered call examples on NEM stock. The first will use a monthly expiration and the second will use a seven-month expiration.
Let’s evaluate the first NEM covered call example.
Buying 100 shares of NEM would cost around $4,800. The April 17, 50-strike call option was trading yesterday around $1.10, generating $110 in premium per contract for covered call sellers.
Selling the call option generates an income of 2.35% in 29 days, equalling around 29.52% annualized. That assumes the stock stays exactly where it is. What if the stock rises above the strike price of 50?
If NEM closes above 50 on the expiration date, the shares will be called away at 50, leaving the trader with a total profit of $310 (gain on the shares plus the $110 option premium received). That equates to a 6.61% return, which is 83.19% on an annualized basis.
Instead of the April 17 call, let’s look at selling the November 50-strike call instead.
Selling the November 50-strike call option for $5.10 generates an income of 11.89% in 247 days, equalling around 17.57% annualized.
If NEM closes above 50 on the expiration date, the shares will be called away at 50, leaving the trader with a total profit of $710 (gain on the shares plus the $510 option premium received).
That equates to a 16.55% return, which is 24.46% 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 NEM might drop, which could wipe out any gains made from selling the call.
Barchart Technical Opinion
The Barchart Technical Opinion rating is a 40% Buy with a Strengthening short term outlook on maintaining the current direction.
The market is in highly overbought territory. Beware of a trend reversal.
Implied volatility is at 35.44% compared to a 12-month low of 26.94% and a 12-month high of 44.91%.
The next earnings release is set for April 24th.
Company Description
Newmont Corp. is one of the world's largest producers of gold with several active mines in Nevada, Peru, Australia and Ghana.
Newmont's operating segments are N. America, S. America, Australia and Africa.
The N. America segment has operations in Mexico, Canada and in the U.S.
The S. America segment is represented by operations in Suriname, Peru, Argentina and Dominican Republic.
The Australia segment consists of Boddington and Tanami. Newmont fully owns and operates the Tanami mine.
The Africa segment operations are represented by the fully-owned Ahafo and Akyem mines in Ghana.
Of the 18 analysts following the stock, 8 rate it as a Strong Buy, 1 as a Moderate Buy, 8 as a Hold and 1 as a Moderate Sell.
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.
