Canadian National Railway: Covered Calls

04/26/2017 2:45 am EST

Focus: OPTIONS

Richard Croft

President, R. N. Croft Financial Group, Inc.

Here is our Top Pick for this month — a covered call position on a leading Canadian railway stock, explains Richard Croft, associate editor of The Income Investor.

One of our current stock recommendations is Canadian National Railway Co. (Toronto: CNR). For full disclosure: At Croft Financial Group, we also own CNR in our Option Writing Pool and have sold covered calls against the position.

CNR is an excellent stock against which to write covered calls because it is quite volatile which means you will receive a higher premium when selling the calls.

For example, you could look at buying CNR at a recent $98.45 and simultaneously selling the CNR September 100 calls at $3.25 per share. Between now and the September expiration, you will be eligible to receive two quarterly dividends of $0.4125 per share, which will be in addition to the premium received.

Here are the numbers based on the three potential outcomes for CNR between now and the Sept. 15, 2017, expiration (i.e., 160 days to expiry at the time of writing).

1. If CNR is above $100 per share at the September expiration, the calls will be exercised, and you will be required to deliver your shares to the call buyer at $100 per share. The 160-day return if your shares are called away will be 4.876% plus another 0.0838% with the dividends, for a total 160-day return of 5.714%.

2. If CNR remains unchanged and closes at exactly $98.45 at the Sept. 15, 2017, expiration, the return is 3.301% plus 0.0838% in dividends, for a total return of 4.139%.

3. If CNR declines between now and Sept. 15, 2017, you will not lose anything on your investment unless the shares decline below $95.20 which does not take into account any dividends received.

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