Wells Fargo is showing strong accumulation and looks poised to break out above the 21- and 50-day moving averages.
Wells Fargo stock is a favorite with income investors because the stock currently pays a 2.37% annualized dividend yield.
Savvy investors can further enhance the yield from Wells Fargo stock through the use of covered calls.
A covered call involves buying 100 shares of the underlying stock and simultaneously selling a call option against those shares.
Covered Call Enhances Yield
Selling the call limits the upside but increases the yield from the investment in the form of option premium. The investor keeps the premium generated from selling calls no matter what happens with the stock.
According to the IBD Stock Checkup, Wells Fargo stock is ranked No. 10 in its industry group. It has a Composite Rating of 85, an EPS Rating of 54 and a Relative Strength Rating of 88.
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 a six month covered call against Wells Fargo stock? Let's take a look.
A Dec. 20 call option with a strike price of 60 can be sold for around $4.05, generating $405 in premium per contract.
Purchasing 100 shares of Wells Fargo stock will cost around $5,905. But the net cost can be reduced by the $405 option premium received.
Annualized Yield On Wells Fargo Stock Pops To 14.6%
Therefore, we have created a yield (405 divided by 5,500) in 184 days of 7.36%, or 14.61% per annum in addition to the stock's 2.37% dividend yield.
This covered call trade still allows for around $95 of capital appreciation before shares are called away.
Covered calls are a fantastic way to generate extra income from a stockholding while also providing some downside protection.
Placing the sold call close to the stock price provides the greatest income potential. To skew the trade with more capital gain potential, place the call further out of the money.
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 X/Twitter at @OptiontradinIQ
