Monday, March 17, 2008

Covered Calls for Your Pot 'O Gold

In regards to last Friday's recipe for covered calls, today I thought I'd put my money where my mouth is and research some prospective covered call candidates for your retirement account. Well, if there's one golden rule about research it's this: It takes twice as long and is half as easy as you think it's going to be. Blarney! I was hoping to be done by market close so I chug green beer and dance a few jigs at my local Irish pub, but I guess that will have to be put on hold--aargh! On the bright side, I did find some gold at the end of my research rainbow which will hopefully give you some ideas for your retirement nest egg.

Here's the criteria that took me so long to research:
1. Find optionable stocks with dividend yields > 3%.
2. Make sure those stocks are not in a downward price spiral--that is, their charts don't suck.
3. Make sure these stocks have liquid options. (Looking for open interest > 100 or so.)
4. Make sure these stocks pay a dividend between now and April options expiration (4/18).

Dividend stocks were selected for two reasons: you can write covered calls to gain income in your tax-sheltered account with the dual benefit of deferring taxes on both your capital gains and dividends. I like that concept.

I found six stocks that fulfill the above criteria. The bad news is that they're all REITs. Warning: I have eyes in the back of my head and I know what you're doing--you're holding your nose and thinking I've just taken a dive off the deep end with cement-reinforced boots, but give me a second and hear me out. Sure, real estate has been in the toilet but the REITs have been holding up pretty darn well considering the current rotten market environment. If you look at their charts, the bad news has already been priced in. Lately, they've all been trading sideways with an upward bias--just the type of price action you want for covered calls. The major caveat here is that if you do buy all of these, Jim Cramer will slap you on the wrist for not being properly diversified.

For simplicity and space considerations, I've summarized the stocks on two charts. The first one summarizes dividend information giving current yields, dividend price, the ex-dividend date (the date on or before which you'd need to buy the stock to receive the dividend), and the date the dividend will be payed.

The second chart gives the expected returns on covered calls. Expected returns are derived from today's stock closing prices using the option's last bid. You could increase your return by placing limit orders someplace between the bid and the ask price and praying that it gets executed. (Options are sold at the bid and bought at the ask.) Note that commission costs are not included, and if you're only trading one or two contracts, these costs will make a dent in your return figures. The way around this is to obviously trade more contracts.

That's it for today. We'll be checking in with this portfolio in the next few weeks to see how it's progressing. May the luck of the Irish be with all your trades!

Happy St. Paddy's Day!

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