On Sep. 1 we examined covered call strategies on several stocks that already have an attractive and safe dividend yield on their own. Today we'll review the performance of those Sep. strategies, present new Oct. covered call candidates for those stocks and provide two new stocks that are attractive candidates for enhanced yield via covered calls.

As we mentioned on 9/1, the recent spike in volatility in the market has made covered calls a more attractive strategy for those looking to enhance yield on long stock positions. 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 35%, 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.  

Updating 9/1 Covered Call Candidates -- MRO, CAG, COP and WM

Strategy 1: Marathon Oil (MRO 25.13) -- Sell the Oct. 27 Call

MRO has come under pressure along with the broader market and after reporting disappointing earnings at the beginning of August. The stock has stabilized but volatility remains relatively elevated, giving the calls an attractive premium.  The Oct $27 calls are currently bid at $0.49, representing a premium of 2.0% of the current stock price. Annualizing this would yield 24%. For a smaller probability of being called away, but a smaller premium as well, the Oct $28 calls are currently bid at $0.30, representing a premium of 1.2% of the current stock price -- annualizing this would yield 13.9%.

MRO has raised its dividend in four of the past five years, and the combined company had a cash dividend coverage ratio of 7.3x, meaning the dividend is relatively safe. Following the recent spin-off, the aggregate $0.25 per share quarterly dividend ($1 per share per annum dividend) will be maintained by allocating the dividend as follows: MRO will pay an initial dividend of $0.15 per quarter or $0.60 per year (representing a 2.4% yield) and MPC will pay $0.20 per quarter or $0.80 per year (also representing a 2.4% yield).

MRO earnings are expected in early Nov.

Strategy 2: ConAgra (CAG 23.45) -- Sell the Oct. 25 Call

CAG also came under pressure along with the broader market. The CAG Oct $25 calls can be sold for $0.20, representing a premium of 0.9% of the current stock price. Annualizing this would yield 11%.

CAG has a 3.7% dividend yield, which grew 13% last year. Additionally, the company has raised its dividend in four of the past five years, and has a cash dividend coverage ratio of 3.9x, meaning the dividend is relatively safe. 

CAG earnings are expected on Sep. 20.

Strategy 3:  ConocoPhillips (COP 66.46) -- Sell the Oct. 70 Call

COP looks similar to MRO, tracking the broader market and oil prices. The COP Oct $70 calls are currently bid at $0.74, representing a premium of 1.1% of the current stock price. Annualizing this would yield 14%.

COP has a 3.7% dividend yield, which grew 13% last year. Additionally, the company has raised its dividend in each of the past five years, and has a cash dividend coverage ratio of 4.8x, meaning the dividend is relatively safe. 

COP earnings are expected in late Oct.

Strategy 4:  Waste Management (WM 31.15) -- Sell the Oct. 33 Call 

WM has been volatile along with the broader market during Aug, and its stock has also seen a decent bounce as the market rebounded, up nearly 18% off of its Aug low. The WM Oct. $33 calls are currently bid at $0.50, representing a premium of 1.6% of the current stock price. Annualizing this would yield 19%.

WM has a 3.9% dividend yield, which grew 9% last year. Additionally, the company has raised its dividend in each of the past five years, and has a cash dividend coverage ratio of 4.1x, meaning the dividend is relatively safe. 

WM earnings are expected in late Oct.

New Covered Call Ideas -- LEG & RTN

New Strategy 1: Legget & Platt (LEG 21.14) -- Sell the Oct. 22.5 Call

LEG has seen a nice rebound off of its August lows, but volatility remains relatively elevated, giving the calls an attractive premium.  The Oct $22.50 calls are currently bid at $0.35, representing a premium of 1.7% of the current stock price. Annualizing this would yield 20%.

LEG has an attractive dividend yield of 5.0% on its own. Additionally, the company has raised its dividend in each of the past five years, and has a cash dividend coverage ratio of 2.5, meaning the dividend is relatively safe. 

LEG earnings are expected in late Oct.

New Strategy 2: Raytheon (RTN 41.66) -- Sell the Oct. 43 Call

RTN's Oct $43 calls are currently bid at $0.50, representing a premium of 1.2% of the current stock price. Annualizing this would yield 15%.

RTN has a dividend yield of 3.8%. It has raised its dividend in each of the past five years, and has a cash dividend coverage ratio of 2.2. 

LEG earnings are expected in late Oct.

-- Chris Borgmeyer, CFA