Over the past year, we've been providing attractive covered call strategies on several stocks that already have a healthy and safe dividend yield on their own. Today we're providing an update with several attractive covered call candidates for the July and August expiration cycles, all which provide an attractive call yield on top of an already strong dividend.

New July Covered Call Candidates

While volatility has pulled back from the June highs, it is still elevated from the March lows, now around the mid-point of the 2012 range. Macro headline risk remains high as well, and while the short call will provide some offset to a downside move in the stock, it will not protect well against a substantial move lower. These strategies will perform best in a choppy/sideways market, or in a market that moves higher slowly. While volatility is likely to remain elevated through the summer, the sale of calls can represent an attractive, low-risk yield strategy to enhance returns on core positions. See table below for summary of the strategies for the July expiration cycle.

Summary of New July Covered Call Strategies:  

New August Covered Call Candidates

A similar situation is affecting August options, but with more time to expiration.  Here, since we're two-months out, the annualized premium calculation is based on doing this every two months, rather than every month. 

Summary of New July Covered Call Strategies:   

Background On Our Enhanced Covered Call Strategy:  

Instead of just scanning for attractive covered calls, we like the idea of selling calls against stocks that already have an attractive and safe dividend yield on their own, as these stocks may see less downside in the event of further broad market pressure and investors are increasingly demanding safe yield these days.

For those unfamiliar with the strategy, a covered call is an income generating option position that involves selling one call option for every 100 shares of underlying stock owned. The sale of the call option generates cash from the premium received on the sale of the option, which produces additional income and reduces the downside risk on the stock position. The drawback is that the sale of the call limits the available upside in the stock position, as it gives the call buyer the right to purchase the stock from the call seller at the strike price. It is a limited risk/limited profit strategy.

The strategy we envision here is selling an upside front month call each month on the stocks highlighted below (one short call per 100 shares of long stock) to generate a healthy monthly yield on top of the already attractive dividend yield on the stocks. There is risk that the stock gets called away at the strike price, but we looked to minimize this by focusing on situations where that risk is estimated to be less than 33%, so the stock would be less likely to get called away. In the event that the stock does move above the call strike price, one can either buy the call back at expiration or let the stock get called away, and buy it back post-expiration. We will continue to follow these stocks as if the call is bought back at expiration if the stock is set to expire above the strike price, rather than allowing the call to expire in the money and getting the stock called away.

-- Chris Borgmeyer, CFA

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This report should not be considered a comprehensive list of volatility events -- there may be other scheduled or unscheduled events that represent significant volatility catalysts that are not discussed here. 

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