With the market acting better, we can start looking at more bullish option trade ideas. ServiceNow (NOW) was added to IBD Leaderboard as a half position on Tuesday.
Unfortunately, NOW stock does not pay a dividend. But savvy investors can still create a yield from RCL using covered calls.
A covered call involves buying 100 shares of the underlying stock and simultaneously selling a call option against those shares.
Selling the calls limits the upside but increases the yield from the investment in the form of option premium.
Create Your Own Yield On NOW Stock
The investor keeps the premium generated from selling calls no matter what happens with the stock.
According to the IBD Stock Checkup, NOW stock is ranked No. 1 in its industry group. It has a Composite Rating of 99, an EPS Rating of 99 and a Relative Strength Rating of 95.
When trading covered calls, most investors sell monthly calls against their stock to make the most of the effects of time decay.
That makes a lot of sense but also requires a lot of active management.
What if we sold yearly covered calls against NOW stock? Let's take a look.
NOW Stock Yearly Covered Call
On NOW stock, a January 2025 call option with a strike price of 620 could be sold late Wednesday for around $98.60, generating $9,860 in premium per contract.
Purchasing 100 shares of ServiceNow stock will cost around $59,500. But the net cost can be reduced by the $9,860 option premium received.
Therefore, we have a potential return of about 20% (9,860/49,640) in 442 days, which is 16.37% annualized.
That sure beats the dividend yield on most stocks in the current market.
Covered calls are a fantastic way to generate extra income from a stockholding while also providing some downside protection.
Investors would need to weigh the pros and cons of the stock before initiating a bullish trade like a covered call.
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.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setup is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
