Tuesday, March 5, 2013

PSX and MPC for covered call income + QCOM




Phillips 66 PSX
May $70
Strike Price
$70.00
Cost Basis
$65.60
Call Premium
$2.10
Dividend
$0.00


Gain in $ if assigned
$6.50
Call Yield
3.00%
Gain Yield
9.29%


This is a good time to review how to use covered calls to boost income.  I look for covered call income all the time and today I found a couple that I want to share.


You need to be knowledgeable about covered calls because they include risk.  You need to know about the call and you need to know about the stock.

Then, you need to execute your trade.




The Call:


One covered call requires you to own 100 shares of a company.   Each call includes premium income, strike price and duration.  You will receive money (premium income) in exchange for agreeing to sell your 100 shares of stock at a set price (strike price) and the obligation expires on a set date (duration.)  The PSX call illustrated above created $2.10 of income (the premium): the strike price is $70.00 and the obligation expires May 18, 2013 or 74 days from today.  


I always want the premium income yield to be at least one percent.  I use the covered call calculator illustrated above to quickly determine if the call income is enough for me.  In this case the income will yield me three percent.

I always like the strike price to deliver a gain above my cost basis.  In the PSX trade, I bought today at $65.60 so that is my cost basis.  The strike price of $70 is a gain of 9.29%.

I rarely sell a call with a duration of more than 90 days.   In this case the duration is 74 days.


The Company:




PSX is a company that pays a dividend and is otherwise solid.  These are companies I am looking for.  Plus, PSX make a ton of earnings. 


Marathon Pet MPC
April $ 95
Strike Price
$95.00
Cost Basis
$88.14
Call Premium
$1.25
Dividend
$0.00


Gain in $ if assigned
$8.11
Call Yield
1.32%
Gain Yield
8.54%


The company I seek does not have to meet all the conditions of a dividend machine but it does have to be strong enough a company that if I am stuck with it, I will at least get income on my investment in the form of a dividend...


Another covered call I sold today was Marathon Petroleum, MPC.   Using the covered call calculator, you can see the premium income of $1.25 is equal to a yield of 1.32%.  The strike price of $95 would be an 8.54% gain on my cost basis of $88.14.  The duration of this call is 46 days.  It expires on April 20, 2013.


Once you sell a call on a company, you have to hold that stock at least until the end of the call period.  If the stock price exceeds the call strike price, the buyer of your call will most likely also buy your stock.


On the other hand, if the stock price at the end of the duration of the option is less than the option strike price, the call buyer will not buy your stock and you will still own it.   You can then decide to sell the stock or keep it.   Often times, you can sell another call on your shares.  You may not be able to find a call that you like and you are stuck with a company that may be worth less than what you paid.   You certainly want to get income as you wait the company to improve.  This is why it is important to understand both the call and the company.



Execute the Trade:


I buy the stock first and then sell a covered call on the shares I bought.  



This post illustrates two stocks I bought today and then sold covered calls.

TheMoneyMadam


Update 3/6/3013  another example of a covered call see the covered call calculator on QCOM.


Qualcomm QCOM
May $72.50
Strike Price
$72.50
Cost Basis
$66.64
Call Premium
$0.65
Dividend
$0.00


Gain in $ if assigned
$6.51
Call Yield
0.90%
Gain Yield
8.98%