Covered Calls for Growth and Income

11/27/2013 9:00 am EST


Marvin Appel

President, Signalert Asset Management LLC

In our growth and income portfolio, we take positions in covered calls; here's a look at three of our newest call-writing positions, explains Marvin Appel in Systems & Forecasts.

Southern Company (SO)

Utilities, along with many other high-dividend stocks, peaked in May and attempted to rally in July, before stalling or pulling back. The cause of their problems was the notion that the Fed might taper its quantitative easing.

Although that possibility now appears at least several months away, Treasury bond and utility stock prices never recovered, even after the Fed surprised the markets by announcing, on September 18, that it would charge full steam ahead.

Southern Company appears to have found support in the area of $40.50-$41.00 per share in the past two months.

As a result, the portfolio will rewrite calls expiring on December 21, 2013, at the strike price with the most time value. As of this writing, with SO at $41.37, those would be the $41 calls at $0.92 bid.

Kinder Morgan Energy LP (KMP)

Kinder Morgan is one of the largest energy transport companies in the US. Its stock has been strong for many years, but has slipped in the past six months as interest rates popped up.

Its price/earnings ratio is attractive relative to other companies in the same industry, and its yield of 6.7% is likewise near the top.

The company's management has done a good job, growing earnings by over 20% since 2008, even though sales are lower now than they were five years ago. (Over the past four years, revenues have been increasing steadily.)

KMP has drifted down towards, what appears to be, a support area in the $78.25-$79.00 area. This makes covered call-writing appear to be relatively low-risk. With KMP at $80.72, the December $80 calls were trading at $1.74 bid.

International Paper (IP)

Paper is a slow-growing, cyclical, and capital-intensive business. It is therefore surprising that IP has actually outperformed the S&P 500 (SPX) over the past seven years.

Because the industry is so cyclical, its options are relatively rich. The stock has found support in the $43 area. This is one of the few cases where the option premium is sufficiently high to cover the downside risk to the nearest support zone.

With the shares at $44.40, the $44 calls expiring on December 21, 2013, were $1.53 bid, and the $45s were $0.99 bid. (In this case, the in-the-money call has more time value and would be the recommendation.)

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