How do you cope with the prospect that flat or negative returns may mark the next several years?
One method is to structure our portfolios so that they are more focused on income creation than on growth.
Covered calls are an excellent strategy for producing income; they are one of the most straightforward options to comprehend and apply. They perform well in flat, rising, and falling markets.
What Is A Covered Call?
As a stock or futures contract owner, you have various rights, including the ability to sell the securities at any moment at the market price. Covered call writing allows you to sell this right to another party in exchange for cash, granting the buyer of the option the right to possess your securities on or before the expiration date at a fixed price known as the striking price.
A covered call is a position that consists of shares of the underlying stock and a call option on that stock. A covered call is when you sell the call option while still holding the underlying stock. Covered calls enable the holder to purchase the underlying stock at a certain price and time. And in order to take advantage of this, the call buyer must pay a premium to the seller. This premium is the main reason why many investors pursue this technique. Numerous stock advice firms provide their members and customers with recommendations on a handful of the greatest stocks.
A call option is a contract that gives the buyer the legal right (but not the responsibility) to purchase 100 shares of the underlying stock or one future contract at the strike price at any point during the expiration of the contract. Suppose the seller of the call option also holds the underlying securities. In that case, the option is deemed "covered" since the seller may deliver the instrument without having to purchase it on the open market at potentially disadvantageous prices.
Selling covered call options may help mitigate downside risk or increase upside return by exchanging the cash premium for future gains over the strike price plus the premium throughout the contract term. In other words, if XYZ stock closes over $59 in the example, the seller gains less than they would if they just kept the stock. A stock closing below $59 a share after six months might result in a higher or lower profit or loss for those who sold options on the stock, depending on how the stock performs at the end of that period of time.
The Risks of Covered Calls
Call sellers must keep ownership of the underlying shares or contracts. Otherwise, they will sell naked calls, which have a potentially endless loss potential if the underlying asset grows in value. Consequently, sellers must repurchase options holdings before expiry to sell shares or contracts, rising transaction costs while diminishing or increasing net gains or losses.
Which Stocks Are the Best for Covered Call Writing?
The greatest stocks for covered call writing are ones that call options buyers to predict will grow in value in the near future. As such, while picking the finest stocks for covered call writing, you should search for the following stocks:
Current dividend yield of at least 3%
Has a recent track record of rapid share price increase
It is located in an industry that is projected to do strongly in the short term
A dividend-paying stock is appealing for a variety of reasons. You are compensated for your patience in waiting for the stock to increase, and you may reinvest the proceeds in more stocks to compound your rate of return.
Stocks that have lately performed well are predicted to outperform the market in the future. They get greater attention from the mainstream media, which accentuates the stock market's herd mentality.
Additionally, call option buyers are ready to pay a higher premium for stocks in "hot" sectors at present. As a seller of covered call options, this implies you may earn a greater rate of return without taking on more risk.
Each covered call deal has three components: the underlying stock, the term, and the strike price. To determine the best-covered call stocks, who must evaluate all three factors. Depending on your investing strategy, you have many possibilities for selecting the best-covered call stocks:
Because the stock's performance determines the return on investment, choose stocks that you want to include in your portfolio. A stock with a falling price trend will make profiting more challenging.
Always consider if the premium is worth the risk associated with the covered call strategy.
Who may use an online stock screener to generate a list of stocks that match those three criteria?
That, however, is insufficient. A recent search utilizing those parameters yielded approximately 100 results. That is an excessive number, and you must further narrow the list by searching for names that investors would find appealing.
With trade tensions at an all-time high, firms that derive the majority of their revenue in the United States are gaining favor. Who should avoid energy stocks since unpredictable oil prices frighten away many investors? Additionally, corporations that are category leaders are seen to be safer than lesser-known firms.
We feel the following are three stocks that satisfy all of our criteria and are among the best for covered call writing.
ConocoPhillips (NYSE: COP)
ConocoPhillips operates on a global scale, exploring for, producing, transporting, and selling crude oil, bitumen, natural gas, natural gas liquids, and liquefied natural gas. Solar energy stocks have fueled the stock market's advances this quarter.
ConocoPhillips claimed an exceptional fourth-quarter operating performance for the year 2021 in its fourth-quarter report. The business earned outstanding returns on invested capital and completed two substantial, highly accretive acquisitions in the Permian Basin's heartland. The corporation achieved adjusted profits of $8 billion and earnings per share of $2.27. Additionally, ConocoPhillips handed shareholders $2.4 billion in cash dividends. The corporation recorded a return on capital employed of 14% and produced $10.4 billion in free cash flow.
Additionally, ConocoPhillips anticipates an average daily output of about 1.8 million barrels of oil equivalent in 2022 and intends to spend $7.2 billion in capital expenditures. The business just finalized the purchase of Shell's investment in the Permian for a cash payment of $9.5 billion.
At the price of writing, ConocoPhillips is trading at $94.86 per share, and then the firm's market capitalization is $94.86 million. According to CNN money, experts projected a 12-month price goal of $128, a minimum of $77, and a median price target of $106.
Ford Motor (NYSE: F)
Ford Motor Company is an automotive manufacturer known for its Ford and Lincoln brands. In March 2022, the firm stated that it would operate its combustion engine business, Ford Blue, and its battery electric vehicle business, Ford Model e, separately but under the Ford Motor Company umbrella. The corporation has about 12.5 percent of the US market, approximately 6.5 percent of the European market, and approximately 2.4 percent of the Chinese market, including unconsolidated affiliates. We anticipate increased market share as inventory replenishes after the chip shortfall. The United States accounted for about 64% of the company's overall revenue in 2021. Ford employs around 183,000 people, including approximately 56,000 members of the United Auto Workers, and is headquartered in Dearborn, Michigan.
Nvidia (NASDAQ: NVDA)
NVIDIA is a maker of graphics cards and a creator of graphics processing units (GPUs). The firm offers a portfolio of graphics and general-purpose GPU (GPGPU) solutions for supercomputing and artificial intelligence (AI) acceleration and rack-mounted AI acceleration units and GPGPU servers. NVIDIA's GeForce name is synonymous with some of the most well-known consumer graphics cards. NVIDIA GeForce is the company's biggest gaming platform, with over 200 million users.
NVIDIA has released its 2022 annual report. The corporation recorded revenue of $16.7 billion, a 53 percent raise over the previous year. Net income was $4.3 billion, and profits per share were $6.9, up 53% from last year. The year proved to be a watershed moment for NVIDIA's computing platforms. The company's pioneering work in accelerated computing has resulted in gaming being the world's most popular form of entertainment, the democratization of supercomputing for all scholars, and the emergence of artificial intelligence as the most powerful force in technology.
The business anticipates revenue of around $5.3 billion and gross margins of 63.8 percent to 66 percent in the next quarter.
NVIDIA has a market valuation of more than $607 billion, and the company's shares are now trading at $243.85. According to CNN Money, experts anticipated a 12-month price goal of $400, a minimum of $210, and a median price target of $350.
Cybersecurity stocks have developed into a high-growth industry, generating considerable investor interest.
PepsiCo (NASDAQ: PEP)
PepsiCo is a global food and beverage company. It manufactures, promotes, and distributes a diverse range of beverage and food brands, including Pepsi, Mountain Dew, Gatorade, Doritos, Lays, and Ruffles. The company has an integrated go-to-market strategy, while in some areas, it does rely on third-party bottlers, contract manufacturers, and distributors. In addition to its own brands, Pepsi collaborates with other companies, such as Starbucks, to manufacture and distribute other brands. The North American region, which includes Frito-Lay North America, Quaker Foods North America, and North American drinks, generates almost 60% of the company's total revenue.
Advanced Micro Devices (NASDAQ: AMD)
Advanced Micro Devices, Inc. is a leading semiconductor firm operating on a worldwide scale. The company operates via the following segments:
Computing and Graphics section - This category covers processors and chipsets for desktop and laptop computers, discrete and integrated graphics processing units (GPUs), data centers, professional GPUs, and development services.
Enterprise, Embedded, and Semi-Custom section — This category covers server and embedded processors, semi-custom system-on-chip (SoC) devices, development services, and gaming console technologies.
The corporation just issued its annual report for 2021, in which it recorded a record revenue of $16.4 billion, up 68% from 2020, and a gross margin of 48%. Additionally, the corporation recorded a huge increase in profitability, with a net income of $3.2 billion and profits per share of $2.57. Additionally, operational cash flow was $3.5 billion, a 229 percent increase year over year. AMD announced a record $3.2 billion in free cash flow, a 314 percent increase.
The fiscal year 2022 prognosis is optimistic. AMD anticipates a 31% increase in revenue and a 51% increase in gross profit.
Advanced Micro Devices is valued at $200 billion on the stock market, and the company's share is now selling at a price of $123. According to CNN Money, experts anticipated a 12-month price goal of up to $246, a minimum of $100, and a median price target of $156.
Walmart (NYSE: WMT)
When the culture of the United States is shaken, it's not uncommon for people to turn to Walmart for solace. Stable stock prices may be attributed to the fact that low-cost staples never go out of style. Market-safe haven investors often soften the damage if a company has a setback.
During the COVID crisis, Walmart showed its resilience in the face of both the virus and Amazon's near-total dominance in almost every other retail sector. Stock in Walmart has never closed below triple digits and has exhibited strong resistance ahead of the crucial $100 threshold, which may help safeguard a covered call strategy from losing money.
Devon Energy (NYSE: DVN)
Devon Energy is a prominent oil and gas producer in the United States, with a premium multi-basin portfolio highlighted by a world-class Delaware Basin acreage position. Devon's rigorous cash-return business strategy is intended to create significant returns, free cash flow, and capital returns to shareholders while maintaining a focus on safe and sustainable operations. According to the CEO, these ideas have helped Devon establish itself as a renowned and consistent builder of economic value throughout the cycle. Discover the industry's top crypto mining firms.
The firm has announced its fourth-quarter financial and operational performance for 2021. Profits were recorded as $4.3 billion in total and $1.4 billion in net earnings. The company earned $2.23 earnings per share. The corporation maintained a good cash position of $2.3 billion and improved its debt status. The corporation was able to pay down $1.2 billion in debt and maintain a net debt to equity ratio of 0.8 times as of December 31, 2021. Devon Energy has paid dividends for 29 straight years. The corporation declared a $1 dividend per share for the current quarter. Numerous paid courses and technical analysis publications are available that give a comprehensive understanding of Technical Analysis.
The firm is well-positioned to achieve significant growth in 2022. Devon Energy expects total production to range between 570 and 600 MBOED, and the company is well-positioned to earn an excellent free cash flow return.
Devon Energy is valued at $39.55 billion on the stock market, and the company's price is now trading at $59.55 per share. According to CNN Money, experts anticipated a 12-month price goal of up to $70, a minimum of $60, and a median price target of $59.54.
Oracle (NYSE: ORCL)
Oracle's six-month chart seems to be quite constant except for an enormous drop below $40 during the coronavirus market lows in March. There were no notable industry headlines for the multinational computer technology corporation; it merely went about its business as usual. If you're looking for a great covered call play, consider Oracle.
Additionally, you may benefit from the dividend, which is now hovering around 1.75 percent. It is usually prudent to attempt to keep the stock while selling calls to catch the dividend and add another source of income to offset any stock position losses.
United Parcel Service
UPS is the largest package delivery company in the world. Although UPS works in over 200 countries and territories, over 75% of company revenue last year came from inside the United States.
The corporation divides its operations into three major segments: domestic in the United States, international, and supply chain and freight. During the second half of 2018, the firm had great growth in all three categories.
UPS spent about $5 billion on the operations of its company in 2018. UPS generates sufficient free cash flow to fund these investments, enabling it to continue enhancing its capabilities and competing effectively against its counterparts.
Recent oil price declines should provide another short-term boost to these shares. Fuel is one of UPS's greatest input expenses, and I can only presume that Who did not completely include management's already optimistic estimate.
UPS normally announces dividend hikes for the next March payment around February. We wouldn't be shocked if Who boosted the quarterly payout to $1.00/share or higher after 2018's robust profits growth.
UPS has also leveraged its cash flow to reward shareholders via an aggressive share repurchase program. UPS's repurchase program has lowered the company's total share count by 6.9 percent during the previous five years.
Summary
When performed properly, a covered call strategy may be a considerable contribution to a portfolio. If you're looking to boost your portfolio's yield, adding covered calls to your stock holdings is wise. By adhering to your established approach for writing covered calls, you may begin raising the revenue at which your portfolio money is created and reinvesting it.
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