In the current market environment, investors might be more interested in generating income rather than capital gains.Â
3M Company (MMM) is down 5% in the last 6 months and is currently showing a dividend yield of 5.15%.
Using options, we can generate an additional income from high yielding stocks via a covered call strategy.
MMM Covered Call Example
Let’s look at two different covered call examples on MMM stock. The first will use a monthly expiration and the second will use an eight-month expiration.
Let’s evaluate the first MMM covered call example. Buying 100 shares of MMM would cost around $14,276. The September 16, 145 strike call option was trading yesterday around $2.50, generating $250 in premium per contract for covered call sellers. Selling the call option generates an income of 1.78% in 21 days, equalling around 29.57% annualized. That assumes the stock stays exactly where it is. What if the stock rises above the strike price of 145?
If MMM closes above 145 on the expiration date, the shares will be called away at 145, leaving the trader with a total profit of $474 (gain on the shares plus the $250 option premium received). That equates to a 3.38% return, which is 56.07% on an annualized basis.Â
Instead of the September 145 call, let’s look at selling the April 145 call instead. Selling the April 145 call option for $10.55 generates an income of 7.98% in 238 days, equalling around 12.19% annualized. If MMM closes above 145 on the expiration date, the shares will be called away at 145, leaving the trader with a total profit of $1,279 (gain on the shares plus the $1,055 option premium received).
That equates to a 9.67% return, which is 14.77% on an annualized basis.
These figures don’t include any potential dividends received during the course of the trades.
Of course, the risk with the trade is that the MMM might drop, which could wipe out any gains made from selling the call.
Barchart Technical Opinion
The Barchart Technical Opinion rating is a 32% Sell with a Weakest short term outlook on maintaining the current direction.
Implied volatility is at 25.59% compared to a 12-month low of 16.05% and a 12-month high of 34.15%.Â
Company Description
3M Company together with its subsidiaries operates as a diversified technology firm. It has manufacturing operations across the globe and serves diversified customer base primarily in the United States, Europe, Middle East and Africa; Latin America/Canada; and the Asia Pacific regions. The company has four business segments. The Safety & Industrial segment mainly serves customers in the electrical, safety and industrial markets across the globe. The Transportation & Electronics segment primarily serves original equipment manufacturers in the electronics and transportation industries across the globe. The Health Care segment engages in serving customers in the global healthcare industry. Businesses within the segment are oral care, medical solutions, food safety, separation and purification sciences, and health information systems businesses. The Consumer segment provides office supply, stationery, home improvement products, homecare products and consumer healthcare products.
Of the 15 analysts following the stock, 10 rate it as a Hold, 1 has a Moderate Sell rating and 4 have a Strong Sell rating.
Covered calls can be a great way to generate some extra income from your core portfolio holdings.
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, August 25, 2022.
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