Covered Call Screener Results For October 4th

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, LLY, BP, SBUX and UNH.

PDD Covered Call Example

Let’s evaluate the first line item, a PDD covered call. Buying 100 shares of PDD would cost $6,647. The December 70 strike call option was trading yesterday around $7.10, generating $710 in premium per contract for covered call sellers.

Selling the call option generates an income of 11.96% in 72 days, equaling around 59.79% annualized. That assumes the stock stays exactly where it is. What if the stock rises above the strike price of 70?

If PDD closes above 70 on the expiration date, the shares will be called away at 70 leaving the trader with a total profit of $1,063 (gain on the shares plus the $710 option premium received).

That equates to a 17.9% return, which is 90.8% on an annualized basis.

PDD is currently followed by 10 analysts with 7 Strong Buy ratings and 3 Hold ratings. The Barchart Technical Opinion rating is a 100% Buy with a strongest short term outlook on maintaining the current direction.

The current IV Percentile is 20% which means that the current level of implied volatility is higher than 20% of all occurrences in the last 12 months.

SBUX Covered Call Example

Let’s look at another example, this time using Starbucks.

Buying 100 shares of SBUX would cost $8,851. The December 90 strike call option was trading yesterday around $4.80, generating $480 in premium per contract for covered call sellers.

Selling the call option generates an income of 5.73% in 72 days, equaling around 28.67% annualized. That assumes the stock stays exactly where it is. What if the stock rises above the strike price of 90?

If SBUX closes above 90 on the expiration date, the shares will be called away at 90 leaving the trader with a total profit of $629 (gain on the shares plus the $480 option premium received).

That equates to an 8.1% return, which is 41.3% on an annualized basis.

SBUX is currently followed by 26 analysts with 12 Strong Buy ratings and 14 Hold ratings. 

The Barchart Technical Opinion rating is a 64% Buy with a strongest short term outlook on maintaining the current direction.

The current IV Percentile is 96% which means that the current level of implied volatility is higher than 96% 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, October 4, 2022.

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