10 High Yielding Covered Calls Options Trades

Speculators who take more risks could get 60% to 80% annualized returns by selling in the money covered calls on these mostly depressed 10 stocks.

By Donald E. L. Johnson

Cautious Speculator

• The riskier a stock or options trade is, the higher the potential return on risk.

• CFRA’s 10 best options trades on TDAmeritrade.com involve selling ITM covered calls on some beaten down and mostly expensive stocks.

• Three of the stocks have Barchart.com buy momentum ratings; the rest have sell ratings.

• My spreadsheet shows the potential returns and risks.

• Doing several small trades diversifies risks and makes it more likely that some of the trades will be profitable. No guarantees.

There is a 50% to 60% chance that speculators who buy some depressed and fairly risky stocks and sell in the money (ITM) covered calls on them will make up to 60% to 80% annualized returns on risk (ARoR) on the trades. Even if the trades do not work out perfectly, they could be profitable, depending on what happens to the stocks’ prices.

The trades were proposed last week by a stock picking service (CFRA) on TDAmeritrade.com. Click on the images and zoom in. At first glance, the CFRA “best 10” watch list looked interesting. After doing some due diligence, I think these trades on these stocks are not for everyone even though CFRA rates these covered calls trades as low risks.

The stocks are a mixed bag of big names like Tesla Inc. (TSLA), Crocs Inc. (CROX), Enphase Energy Inc. (ENPH) and Etsy Inc (ETSY) and less well known names including Trade Desk Inc. (TTD), Solaredge Tech. (SEDG), Atlassian Corp. (Team), Ambarella Inc. (AMBA), Datadog Inc. (DDOG) and Zscaller Inc. (ZS).

This is how CFRA defines its ratings.

CFRA, a highly rated investment advisory service that competes with MorningStar.com, gives its highest 5 Star ratings to CROX, DDOG, TEAM, and TSLA. ENPH, TDD, ZS and AMBA have 4 Star ratings and ETSY has a 3 Star rating.

What they seem to have in common are their strike deltas and probability of expiring out of the money (OTM) when their call options expire in 52 days on June 16, 2023.

Analysts’ average target prices on these stocks are equal to or higher than their closing prices on April 21.

The calls options premiums provide up to 10% hedges or margins of safety on the trades. The 7.9% to 11.4% cushions make the trade look a bit less risky, but a lot of stocks drop more than 10% in 52 days.

The companies’ price to free cash flow (P/FCF) ratios range from a low of 18.3 for CROX to 99.4 for TSLA. None of the stocks look very under valued. Some might buy the stocks figuring that they are due to snap back, but no one can predict prices.

Each call option is a contract for 100 shares. If a trader does all 10 trades, the investment will be about $142,000 and the potential ARoR would be about $100,000. To get the AROR, a traders would have to do trades that generated the same RoR about 7 times in the next 12 months.

Some traders might do all of the trades, and others might pick one or two of the trades to see what happens before doing a lot of trades on these or other stocks every 52 days or so.

Only CROX, TTD and SEDG have momentum buy ratings on Barchart.com. The rest are rated sells. Those sell ratings combined with the delta and OTM ratings show how risky these trades are. Delta rating, among other things, shows the probability that the calls will be higher than the strike price when the call options expire. If that happens, the call options will be exercised.

The OTM ratings shows the probability that the price of a stock will fall below the strike price by the time the call options expire. Then the call options will expire worthless and the trader will keep the stock and can sell covered calls on the stock again.

This is where a trader’s tolerance for or appetite for risk comes into play. If 50% to 60% odds that you might be able to get a 60% or 84% AROR appeals to you, you might do the trades. In that case, the trader will have to watch the trades fairly closely and be ready to buy back the calls at a smaller profit or at a loss before they expire.

Some traders might want to have the calls expire out of the money so they can write calls on the stock again. Others might want the calls to be exercised so they can do the same kind of trade on another stock or do something else.

It is important to open the trades with a plan for each stock and trade. And it’s equally important to be able to change those plans as the stock and options prices change and new information about the company involved comes in while the options trades are open.

TDAmeritrade.com customers can find this recommended strategy by clicking on the “Research & Ideas” tab, then click on “options” and click on “CFRA Best 10”. My RoR and AROR numbers are based on the net debit investment, which is the “risk” part of the trade equation (RoR=call premium/net debit. ARoR=RoR x 365/52.). I think CFRA’s estimated returns are based on the purchase prices of the stocks. CFRA’s best 10 list apparently changes frequently.

Fundamentals

The 10 stocks in this model portfolio are trading at an average of 66.5% of their 52-week highs. They are trading at an average of 98% of their 50-day moving averages and 99% of their 120-day moving averages. They don’t pay dividends. Their Earnings yield and buyback yields are nil. The stocks are depressed for pretty good reasons. That doesn’t mean that they are “cheap.”

CROX, ENH and TSLA have relatively good returns on assets, operating margins and EBITA margins. The rest of the stocks don’t look very profitable.

The balance sheets range from acceptable to weak.

LINKs:

Home Page. See my more than 100 articles on options trading, stocks and watch lists. If you read several of these articles, you’ll learn how my strategies are meant to work. No guarantees. Links to useful web sites are on the lower right corner of the home page. Scroll down.

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Beware. Like all investing, trading stocks and options is risky. I’m an active private speculator who trades covered calls and sells puts on stocks for my accounts. I am not a professional analyst nor a financial advisor. I don't take and won't take responsibility for how other people trade. This article is for educational purposes only. It is not advice. The data presented looked accurate at publication time except for intra-day fluctuations, but I can’t guarantee the accuracy. Traders should do their due diligence. I reserve the right to trade any of the listed stocks and options at any time. I receive no compensation for producing this content nor for any links. I don’t have positions in any of these stocks or options.