In my earliest days of investing, I learned about selling covered calls as a way to bring in additional monthly income. If I think a stock will trade flat-to-down in the near-term, it provides a way to make some additional income from a blue-chip stock that may already pay a dividend.
With selling blue-chip covered calls, you sell the right for another investor to buy a stock you already own at or above a given price on or before a specific date.
The risk is that the stock gets “called away” — that you are forced to sell the stock — if the stock closes above that price. That means you theoretically lose out on additional gains. Of course, you can always buy back the call or just buy the stock at any time.
With blue chip stocks, if the price doesn’t go above the contract strike price, you keep the stock and the premium you earn for selling the contract.
My stock and options advisory newsletter, The Liberty Portfolio, aims to generate additional income every month from a very specific set of stocks that I’ve been trading for more than 20 years. Here are some examples of blue-chip covered calls to sell.
Blue-Chip Covered Calls to Sell: Raytheon Company (RTN)
Raytheon Company (NYSE:RTN) has been on a tear and it is trading just short of its all-time high, closing Wednesday at $217. RTN is a great stock to sell covered calls against because, as part of the aerospace and defense sector, it does well no matter who is in charge of the country.
America must always be the leader in defense spending, and the current President is making sure of that with the new spending bill. Raytheon is certainly a blue chip stock in that sector. America and other countries will always require defense.
Thanks to a high stock price, you can sell RTN covered calls for decent premiums. I am content selling covered calls and getting 1.5% to 2% for the contracts.
The May 18 $220 covered calls sell for $5.55, so you would get a 2.55% return for a 44-day holding period.
Blue-Chip Covered Calls to Sell: Boeing Co (BA)
Speaking of defense contractors, Boeing Co (NYSE:BA) got a little ahead of itself recently, and it has sold off about 13% from its all-time high, closing Wednesday at $327.44. You cannot go wrong holding BA stock for the long-term, but if you feel BA stock is going to trade flat or down, now may be a good time to sell covered calls.
Boeing is seeing good business from its commercial airplanes and defense, but remember it also has a lucrative business in aerospace, network and space systems and a capital segment for equipment leasing and finance.
For BA stock, the May 18 $330 covered calls sell for a whopping $14. That’s because BA has been quite volatile as of late … that’s a 4.24% return.
Blue-Chip Covered Calls to Sell: Microsoft Corporation (MSFT)
Microsoft Corporation (NASDAQ:MSFT) is back! It is doing a terrific job of redefining itself, with multiple new product lines and a new CEO with a vision. It continues to grow earnings and produces robust cash flow.
It has $64 billion in net cash, and generated over $30 billion in free cash flow last year. The business is phenomenal and the stock has responded in kind. MSFT pays a dividend, but it can afford a larger one, with only 39% of its free cash being paid as a dividend.
You can generate more income out of MSFT stock by selling covered calls. The stock closed Wednesday at $92.33. You could sell the May 18 $92.50 covered calls for $3.90. That alone is a very generous 4.2% return. Not only that, MSFT stock goes ex-dividend on May 18, so if you still hold the stock, you’ll get an additional $0.42-per-share.
— The Option Specialist