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Covered Call Screener Results For November 23rd

Barchart - Mon Nov 22, 2021

Covered calls are a great strategy to add to any portfolio, particularly in this era of low yields. Covered calls can offer enhanced yield from stock holdings, in some case, that can be a significant increase. To trade a covered call we need to own (or buy) 100 shares of a stock and then sell a call option against that stock position. The goal is to generate income from the stock holding in addition to any dividends. The premium received from selling the call also covers a small decline in the stock price. However, the trade off is that stock gains are limited above the call option strike price.

High volatility stocks have the highest return potential with covered calls, but they also have the highest risk of an adverse price movement. It’s all about finding a strategy that fits the investors risk tolerance. Let’s look at a few examples using Barchart’s Covered Call Screener. This first example shows the results of the screener with the default parameters selected.

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This result returns some stocks with very low market capitalization and, while the returns look great, the risks can also be very high. Let’s add a filter for Market Cap over 40 billion.

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Now, we’re seeing some more mainstream names such as DIDI, LCID, RBLX, TSLA, MRNA, AMD and ZM.

Covered Call Example

Let’s evaluate the trade with the highest return potential. Buying 100 shares of DID would cost $813. The January 2022, 10 strike call option was trading yesterday around $0.66, generating $66 in premium per contract for covered call sellers. Selling the call option generates an income of 8.84% in 59 days, equaling around 55% annualized. That assumes the stock stays exactly where it is. What if the stock rises above the strike price of 10? If DIDI closes above 10 on the expiration date, the shares will be called away at 10, leaving the trader with a total profit of $253 (gain on the shares plus the $66 option premium received). That equates to a 33.9% return, which is 206% on an annualized basis.

DIDI is currently only followed by one Analyst who has a hold recommendation. The current IV Percentile is 66% which means that the current level of implied volatility is higher than 66% of all occurrences in the last 12 months.

Income Focused Covered Call Examples

The previous example shows a very nice potential return, but required the stock to rally significantly to achieve the full return. Let’s adjust the screener slightly so that we can find more income focused covered calls. We can do this by changing the Moneyness filter to be -5% to 0%. This will give us covered calls that are closer to at-the-money. This means they will have less capital gain potential and focus mainly on the income portion of the trade.

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Here are the results:

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Let’s use RBLX as out example this time.

The January 125 strike call option was trading yesterday around $12.80, generating $1,280 in premium per contract for covered call sellers. Selling the call option generates an income of 11.92% in 59 days, equaling around 74% annualized. 

If the stock rises above 125 at expiry, the total return would be 16.4% or 99% annualized. Here is another example using XLNX. Buying 100 shares of XLNX would cost around $22,053. Selling the 230 strike call with a January 21 expiration date would generate around $2,150 in covered call premium. 

The total capital at risk would be the $22,053 to buy the 100 shares less the premium received of $2,150. That equals $19,903 capital at risk. If we take 2,150 divided by 19,903, that gives us a potential return of 10.80%. On an annualized basis that is 66.83%.

If XLNX closes above 230 on January 21, the shares would be called away and the total return would be equal to the gain on the stock ($947) plus the option premium received ($2,150) for a total gain of $3,097 or 15.6%. That is around 95% annualized.

The Barchart Technical Opinion rating for XLNX is currently a 100% Buy with a strengthening short-term outlook on maintaining the current direction. The current IV Percentile is 99% which means that the current level of implied volatility is higher than 99% of all occurrences in the last 12 months. XLNX is set to report earnings on January 26, so this covered call position should have no earnings risk.

Please remember that options are risky, and investors can lose 100% of their investment. 

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

*Disclaimer: On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. Data as of after-hours, Nov 22, 2021.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.