Monday, January 23, 2017

Covered Call income strategy with QCOM

I have invested in QCOM for the purpose of creating investment income many times.   You can search this blog for the many posts on the subject.  In the "dot.com" era, I had clients who made a killing on QCOM.  My husband retired in 1999 and although I was still working, my investing focused on income.  As an income investor QCOM did not pay me a dividend so I could not buy it. 

This post is about a call I sold today on QCOM.  One might think that since selling covered calls is an income strategy, I should have employed that strategy in 1999.  But part of my strategy is to realize the risk of covered calls is you get stuck with a stock that falls or even fails.  

  • Use a stock that pays a dividend
  • Select an expiration date after the next dividend
  • Realize no less than an 8% gain if your stock is called away.

When you lose principle, it is hard to be happy about a little call premium.  Therefore, I always sell calls on stocks that pay dividends.  I could still lose principle on paper, but I am getting paid to wait.  Moreover, if a company pays a dividend and their other fundamentals are solid (i.e. debt to equity ratio), it is highly likely your stock price will go up again and perhaps you will even have the chance to sell even more calls.

QCOM Fundamentals - getting paid to wait

QCOM took a real hit today on the news of a patent suit with Apple.  I took advantage of the stock price drop and bought at $55.50.  I may not have picked the bottom, but I thought it was a good price for me.  Their annualized dividend is ($.63 x 4 = $2.52) for a yield of 4.54% on my basis.  The next ex-dividend date is 2/27/2017. 

QCOM earned $3.80 last year; paying out $2.02 in dividends.  QCOM's debt to equity ratio is .37 suggesting a solid balance sheet.

THE CALL

This article points out the option activity in QCOM today.  https://www.dividendchannel.com/article/201701/noteworthy-monday-option-activity-qcom-wynn-intc-qcom-wynn-intc-INTC01232017note.htm/.  With this in mind, I looked for QCOM calls.

The call I selected is a $60 strike price with an expiration of 4/21/2017.  I will receive the February dividend provided my shares are not called away early.  Minimally I get an extra 2.52% in yield.  If my stock is called away, the total return is 11.59%.  See the table below.





Another call to consider is the April $62.50.  This call yields less but has more total return potential should the stock be called away. 

Two examples of using QCOM and covered calls to boost your income.

M* MoneyMadam

Disclosure:  Long QCOM with calls