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8 October 2023 Covered Calls Trades Yield 24.3% Annualized Returns On Risk

Stock Picking, Options Trading for Income - Mon Sep 25, 2023

By Donald E. L. Johnson

Cautious Speculator

  • Covered calls trades are yielding 24.3 annualized returns on risk in options premiums.
  • Dividend yields are about 2.49%.
  • Weakening markets make doing buying stocks and selling calls difficult.

The eight October covered calls trades that I’ve done so far will produce an average of about 24.3% in options premiums annualized returns on risk. Their average annual dividend yields are about 2.49%.

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Investors who own or buy 100 shares of each of the eight stocks in this watch list will invest about $77,904. The stocks’ purchase prices less $1,071 in collected options premiums, or net debit, would produce a net debit of about $68,621.

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The trades include three new buy/writes on Bunge Ltd. (BG) , General Mills (GIS)  and Zimmer Biomet Holdings (ZBH) .

October covered calls trades were rolled over from September trades. Those five trades included Intuitive Surgical Inc. (ISRG) , Kraft Heinz Co. (KHC), Kroger (KR) , Newmont Mining Corp. (NEM)  and Pfizer Inc. (PFE).

BG is the only stock in this watch list with a buy rating. On Sept. 21 when I bought BG for $113.41, it had a 100% buy rating on Barchart.com. Analysts gave it a strong buy rating of 4.5 out of a possible 5. The high analyst’s target price was $161. The mean target price was $131 and the low target was $110. BG is at $117.10.

On Sept. 22 when I bought GIS for $64.95, it had a 100% sell rating and a hold rating from analysts. The high analyst’s target price was $96. The mean was $75.56 and the low target price of $69 was above the price I paid for the stock. The GIS 3.63% yielding dividend goes ex-dividend on Oct. 10. This is an in the money (ITM) trade with the strike below the cost of the stock at $62.50. GIS is at $64.755 and may be called at $62.50. If GIS is called, I’ll make $0.39 on the trade.

I bought ZBH on Sept. 21 for $118.18. It goes ex-dividend on Sept. 28 for a $0.24 per share dividend. Analysts rate the stock a moderate buy with a 3.76 rating out of a possible 5. It is a five star stock on Morningstar, which estimates that its fair value is $175. the high target price on ZBH is $172. The mean is $148.32 and the low target price is $120. It is at $117.53.

The rest of the stocks have sell ratings, which pretty much reflects the bearish outlook that a lot of analysts have for the markets near term. I am trading these stocks and covered calls on them for options premiums and dividend income while I wait for the markets and these stocks to rally. When the rally will happen is the big unknown.

At this point, it looks like all of these covered call options will expire at prices below their strike prices. That means I’ll keep the premiums and stocks and sell covered calls on them again in November. After September covered calls trades on Amazon Inc. (AMZN) , D.R. Horton @DHI and Proctor & Gamble Co. (PG) expire this week, I’ll sell October expiration covered calls on them next week.

For investors that are looking for new covered calls trades, this may be a time to sell out of the money calls options on stocks that they already own or just stay in cash and sell some stocks to raise more cash. What traders do will depend on their tolerance for risk and their bullish or bearish expectations for the markets.

What I try to do when I sell covered calls in this market is avoid having the stocks called in a snap back or short covering rally, especially when the stocks are over sold.

There are plenty of places on the Web to find comments on the markets, so I won’t try to predict the unpredictable. I’m looking for a correction, but nobody can predict markets, interest rates nor what crazy politicians around the world to manipulate and affect the markets.

All we can do is manage our risks while we sell covered calls and cash secured puts to generate enough options premiums and dividend income to meet our monthly income goals.

Selling covered calls provides mostly tiny hedges against market down turns. There are no perfect hedges. Going to cash isn’t even a perfect hedge, but a lot of us have been in a lot of cash for a long time and will stay there for the near term, if not longer.

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On the date of publication, Donald E.L. Johnson had a position in: BG, GIS, ISRG, KHC, KR, NEM, PFE, ZBH. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

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