Covered Call Screener Results For September 12th

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.

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 60 billion and 60-month Beta below 1.00. We’ll also change the Moneyness filter from -25% to 0% and add a 50% Buy rating criteria.

Now, we’re seeing some more mainstream names such as PDD, COST and LLY.

PDD Covered Call Example

Let’s evaluate the third line item, a PDD covered call. Buying 100 shares of PDD would cost $6,976. The October 85 strike call option was trading on Friday around $1.79, generating $179 in premium per contract for covered call sellers.

Selling the call option generates an income of 2.63% in 39 days, equaling around 24.03% annualized. That assumes the stock stays exactly where it is. What if the stock rises above the strike price of 85?

If PDD closes above 85 on the expiration date, the shares will be called away at 85, leaving the trader with a total profit of $1,703 (gain on the shares plus the $179 option premium received).

That equates to a 25.1% return, which is 217.7% on an annualized basis.

INTC is currently followed by 10 analysts with 7 Strong Buy ratings and 3 Hold ratings. The Barchart Technical Opinion rating is an 88% Buy with a strongest short term outlook on maintaining the current direction.

The current IV Percentile is 23% which means that the current level of implied volatility is higher than 23% of all occurrences in the last 12 months.

Selling Calls Closer To The Stock Price

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.

Here are the results:

Here we see the annualized returns are lower because the covered calls are closer to the money which means less capital gain potential. However, as you will see the return from the sold call will be higher if the stock stays flat.

Let’s use PDD again as our example:

The October 70 strike call option was trading on Friday around $6.25, generating $625 in premium per contract for covered call sellers.

Selling the call option generates an income of 9.84% in 39 days, equaling around 89.80% annualized. 

If the stock rises above 70 at expiry, the total return would be 10.2% or 88.8% annualized.

Here is another example using BP. Buying 100 shares of BP would cost around $3,169. Selling the 33 strike call with an October expiration date would generate around $90 in covered call premium. 

The total capital at risk would be the $3,169 to buy the 100 shares less the premium received of $90. That equals $3,079 capital at risk.

If we take 90 divided by 3,079 that gives us a potential return of 2.92%. On an annualized basis that is 26.67%.

If BP closes above 33 on October 21, the shares would be called away and the total return would be equal to the gain on the stock ($131) plus the option premium received ($90) for a total gain of $221 or 7.2%.

That is around 62.4% annualized.

The Barchart Technical Opinion rating is a 56% Buy with a strengthening short term signal outlook on maintaining the current direction. 

The current IV Percentile is 44% which means that the current level of implied volatility is higher than 44% of all occurrences in the last 12 months.

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, September 11, 2022.

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