Elite Inside Trader

With the markets hitting new highs, it may be time to look at some stocks that you can write options against that will boost your cash flow for this year.   For those of you unfamiliar with this strategy, you are receiving income for a promise to sell 100 shares (1 option=100 shares) in the future, should the stock move above the call price of the option you select to sell a covered call against.  You’ll see examples in the numbers below.

AT&T (T): $28.34. With Verizon (VZ) making all the gains and headlines recently in anticipation it will be able to sell Apple products in its stores, AT&T hasn’t moved as high in price.  AT&T has excellent cash flow, great business model, and yields a juicy 6% dividend yield.  If you purchase or own the stock, selling the April $29 2011 covered call will yield you an extra $68.  At the current price, that will give you an extra 2.4% per quarter (or 9.6% annualized) on top of the 6% dividend yield.  If the stock moves above $29.00 in the first quarter, you’ll get called away with about 4.8% return on your money for 3 months.  If the stock heads down or stays below $29, you’ve made extra income hedging your position.  Whatever the outcome of the stock, each quarter you must decide to get the stock called away, hold the position, roll over the option to a later month, buy the stock back and do it again, or look for other opportunities at that time.

ALCOA (AA): $16.49. As an Elite Inside Trader Value pick on November 1^st at $13.05, Alcoa is now trading above $16.00.  It released earnings last night and the company seems to be completing its turnaround after a brutal few years in the investor dog house.  While the earnings report was good, the stock is trading lower in after-hours trading, so the numbers may be a bit different at the open tomorrow.  Nonetheless, if you hold this stock or are looking to get in with a hedged play, selling the April $17 2011 covered call will give you $96.  That’s a 5.8% yield (or 23% annualized) on your investment.  The reason you get more premium for selling Alcoa rather than AT&T, is because this stock is more volatile.  The company itself pays a smaller quarterly dividend of $0.04 (0.70% return annualized), so selling calls on this stock can boost returns, hedge your position, or give you a hedged entry into owning the stock.  Get called away in April and you’d still have made 8.8% in 4 months.  Again, the stock released earnings afterhours and these numbers will be slightly different tomorrow when the markets open.

Cisco (CSCO):  $20.79. Cisco, engineer and maker of global communication and IT products globally, has been labeled as an “old tech company” along with Intel (INTC) and Microsoft (MSFT).  Any of these companies stocks would fit the profile to sell covered calls against.  Cisco currently doesn’t pay a dividend, but some expect they may begin to do so this year.  In the meantime, selling an April $21 2011 will give you an extra $100 or selling the April $22 call will give you an extra $60.  The later gives you a bit more breathing room with the stock currently close to the $21 call price.

With internet trading providing cheaper costs to placing stock and option trades, option volumes have been increasing over the last decade as investors seek extra returns and hedged positions.  Whether or not you’re familiar with the covered call strategy, you should consult with a financial advisor before making any decisions.

Disclosure: Author, Kevin D. Monaghan, Senior Account Executive at Elite Investment Group is long AT&T (T)

IMPORTANT NOTICE: "Any information we give you is not our recommendation or advice to take (or not to take) any particular course of action in relation to your investments. You should take your own independent advice based on your specific circumstances."

Tags: AT&T, Calls, Cisco, Covered Calls, CSCO, Dividends, Income, INTC, Intel, Microsoft, MSFT, Options Trade, T, Verizon, VZ, Yields