Best stocks covered call strategy
T , those too are starting to look expensive. Some investors are now reaching into covered call strategies to eke out some extra income, but in our view, they may be executing this strategy in all the wrong places. The story behind the DCF valuation and rising payout ratio has been the same for years.
We believe the stock has increased for two main reasons. First, the DirecTV acquisition provided enough additional free cash flow to successfully patch the dam with regards to the growing free cash flow payout ratio.
As mentioned early, some investors have turned their efforts to covered call strategies to eke out some extra income in the face of the Fed's artificially low interest rates.
For reference, a covered call strategy involves collecting extra income by selling a call option on a stock you already own. If the price of the stock climbs above the call price, it will be taken off your hands called at the pre-determined call price you keep the premium and get the cash from the sale. If the call option expires unexecuted, then you keep the stock as well as the premium you received for selling the call.
The standard deviations are calculated over the same number of days as there are to the call expiration date. Specifically, you'll notice that the strike price of both call options is 0. For example, the following chart shows Gilead's historical price-to-earnings ratio sits near historic lows. Gilead is currently very profitable, but the market expects profits to shrink as competition creeps in with regards to Gilead's blockbuster HIV and Hepatitis drugs.
For example, Gilead missed earnings expectations in Q1 of this year, and profits shrank in Q2, especially versus the second quarter of the previous year. However, we believe the narrative has become too negative considering Gilead's ability to defend its big revenues and profit margins, its track record of generating new growth, its strong cash flows, and its discounted price. Plus, it offers an attractive dividend yield 2.
The driver behind Wells Fargo's attractive valuation has been the market's inclination to sell down all big banks including Wells Fargo as interest rate have remained low low interest rates put downward pressure on bank's net interest margins and their profits. Also worth noting, Wells Fargo offers an attractive 3. Many investors still give big banks such as Wells Fargo a bad rap since the financial crisis, but recent stress tests have proved once again most big banks including Wells Fargo are far less risky and less volatile than they used to be.
Energy Sector ETF NYSEARCA: The energy sector exchange traded fund presents another relatively attractive opportunity to write covered calls.
Given this ETF's low idiosyncratic risks it diversifies away stock-specific risks within the energy sector , its big dividend payments 3.
For example, the following table show the recent call premiums available for XLE versus its ETF peers sorted by "standard deviations out of the money.
What is a Covered Call | The Basics of Covered Calls
And as the table shows, XLE stands out for its high risk-adjusted premiums. Certainly, the energy sector has been volatile and faces unique challenges, but even after adjusting for volatility, we believe XLE covered calls are a compelling opportunity to collect attractive income payments.
If you are going to have exposure to the energy sector, the diversified XLE ETF along with covered calls is a decent way to do it. Oaktree Capital is global investment manager, managing assets across corporate debt, convertible securities, distressed debt, control investing, real estate and listed equities.
It also offers an attractive valuation, a big dividend 4. And if your shares do get called, you end up earning a 6. Main Street Capital NYSE: For starters, Main Street offers a significantly bigger dividend 6.
Main Street's dividend is so large because it has elected to be treated as a Regulated Investment Company RIC and a Business Development Company BDC. This means Main Street generally pays no federal income tax on any ordinary income or capital gains that it pays out as dividends to its shareholders. Main Street's business is basically to provide financing mostly debt and some equity to smaller and mid-sized companies. Main Street is attractive because its Distributable Net Investment Income consistently exceeds its dividend payments, and because its net asset value continues to enable supplemental dividend payments.
Additionally, Main Street is internally managed - a characteristic we like because it often better aligns the interests of management with shareholders. If you are a long-term income-focused investor, Main Street is worth considering. However, that doesn't mean the price can't still go much higher it can.
Best Stocks for Covered Calls, Call Writing Stock Selection
However, we believe there are far more attractive opportunities for income-focused investors, and we've highlighted five of them in his article. It's critically important to consider the risks and total return opportunities when engaging in a covered calls strategy, and we've provided a wider assessment of these in our recent article titled Covered Calls Roadmap: I wrote this article myself, and it expresses my own opinions.
I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. REITs Dividend Ideas Dividend Strategy Dividend News Dividend Quick Picks Editor's Picks. We Prefer These 5 Big Dividends Instead Aug.
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