Selling In The Money Covered Calls Can Yield Big Annual Returns on Risk. See AA, CLF, DFS, MGM, PFE, WFC, XOM

Pick good undervalued dividend stocks with active and liquid stock options that can be used to generate weekly and monthly income by selling covered calls and puts options.

By Donald E. L. Johnson

Cautious Speculator

• Selling covered calls in the money on bullish dividend stocks can produce high returns on risk.

• One of the strategies I am using is presented below.

• Learn the strategy by following and doing the trades posted by a prominent covered calls blogger.

CoveredCallsAdvisor.blogspot.com weekly publishes three or four stock picks and covered calls trades that have been yielding annualized returns on risk of over 30% and over the years have averaged about 24% ARoR, according to the web site.

I’ve done seven of the site’s trades this month with an average ARoR of about 30%. Year to date, the site’s long-time blogger, Jeff Partlow, has posted about 42 trades.

Late Friday, Jeff announced that he had bought Cleveland Cliffs, the country’s largest steel maker and a major producer of iron ore. He bought CLF for $17.84 and sold CLF 9.2.22 $16.50 strike covered calls for $1.62 per share. Assuming the stock will be called before the option expires in 14 days, he expects the ARoR to be about 37.3%. CLF is rolling over. Jeff apparently is looking for a snap back in the next few days.

The CLF calls have a 59% probability of closing above the strike price and out of the money (OTM). The .24 delta suggests that there is a 24% probability that the calls will be exercised.

My new spreadsheet

I plan to do the same trade at slightly different prices Monday as shown below in my new spreadsheet. Please click on the image and zoom in for a better view.

The spreadsheet shows trades of one call option per trade. Investors can trade the number of contracts that fit their budgets. It’s best to do covered calls and cash secured puts trades on at least a dozen stocks and ETFs. If one trade goes a bit awry, the rest probably will work as planned. I use the spreadsheet to calculate returns and risks and to track my trades.

In addition to these trades, I sell cash secured puts for premium income as this blogger does. And I do other trades as I posted in the last couple of weeks.

Candidates for this strategy

These are among the stocks that Jeff has recently traded. On a price to free cash flow ratio basis, they look under valued. They are trading close to their discounted cash flow fair value estimates. And the average stock on this list is 16.6% below analysts’ mean consensus target prices for each stock.

Partlow is using this strategy to trade the stocks shown in the spreadsheet and other tables and charts. He looks for bullish stocks that are trading at least 10% below Wall Street Analysts’ average target prices for each stock. He likes annual dividend yields above 5%. But not all of his trades yield that much. And he likes to trade stocks that will go ex-dividend about seven days before his call options expire, but that is not a hard and fast rule.

YTD, he has done multiple trades on several of thesestocks. I put his recently traded stocks in watch lists on StockCharts.com, as shown below. A watch list that I created on StockRover.com (see above) gives me the average target prices for the stocks and other important metrics like free cash flow and price to free cash flow ratios and fair value estimates.

On Stock Charts, the quick way to find bullish momentum stocks is to look a their StockChartsTechnical Ratings (SCTR) as shown above. Ratings above 40 are bullish and above 60 are strong buys. Stocks with 90 and above SCTR ratings may be ready to correct.

This RSG chart from StockCharts.com shows the leading (green) and improving (blue) stocks in the last 10 days.

The above Market Carpet for the last 10 days shows that the five bullish leaders were DVN, EOG, DIS, VLO and CROX. They be among the best stocks for this strategy next week. We’ll see what Jeff does during the week.

I’ll post my trades in the comments section or blog about them.

LINKs:

Home Page. See previous articles on other trades, stocks and watch lists. If you read several of these articles, you’ll learn how my strategy is meant to work. No guarantees. Links to useful web sites are on the lower right corner of the home page. Scroll down.

Read about some of the trades that I did last week on the home page.

20 Ideas for Adjusting Your Stock and Bond Portfolio, by Christina Lourosa-Ricardo.

How to Beat Inflation Tax, Bear Market Tax With Dividend Stocks, Covered Calls, Cash Secured Puts, by Donald E. L. Johnson.

Wars Breed Inflation, Rising Interest Rates, Market Turmoil, By Donald E. L. Johnson.

Ways to use StockRover.com to analyze stocks

Calls vs Puts Options: What’s the Difference?

How to trade the wheel.

A video on how to place options trades on Think or Swim.

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 own and/or have options positions on IWM, AEO, DFS, DIA, DVN, FDX, PFE, and other equities. 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.

@realDonJohnson. Because I don’t want to litter subscribers’ in boxes with emails, I write only one or two newsletters a day. I’m active most days on twitter and Facebook where I tweet and post about stocks, options trades and other topics.