I periodically employ a conservative 'out of the money covered call' option strategy when I think I can generate some option premium income and I have a strong probability of retaining the underlying security.

Within the last few months I have written articles in which I have disclosed that I have initiated short-term out-of-the-money covered calls on MSFT, BDX, SJM, ADP, CVX, HSY, KFY, and V; the underlying shares are held in various disclosed and undisclosed accounts.

To date, this strategy has worked well as I have been able to generate ~USD $10,000 of additional income while retaining the underlying shares.

I also foolishly purchased calls on STZ and lost ~$5,132 but that trade happened because I did not want to have any direct exposure to the cannabis industry yet I wanted to be in a position to benefit from possible upside to Constellation Brands’ position in Canopy Growth.

In all these covered call trades I was of the opinion that the underlying shares were richly valued and there was a strong probability the share price would close below the strike price by the option expiry date.

I am of the opinion that a pullback in the overall market is likely to occur within the next couple of months. I have, therefore, been combing through my current holdings in an effort to identify companies that appear to be richly valued so I can employ this conservative out-of-the money covered call option strategy.

At this point, I have identified 3 companies where I think this option strategy can be employed. I fully recognize, however, that Mr. Market is irrational so I need to be cautious as the share price of these companies has the potential to become even further detached from reality. Given this,  I choose to write short-term out-of-the-money covered calls where the strike price is well above the current stock price.

I fully recognize that well out-of-the-money options generate much lower premiums than in-the-money, at-the-money, or just out-of-the-money options. I am fine with this. I am not trying to make a killing writing covered calls but am merely trying to skim additional income.

The 3 stocks I have identified as being suitable candidates for my conservative option strategy are Nike, MasterCard, and Automatic Data Processing; I wrote an ADP article for subscribers on February 2nd in which I disclosed that I would be writing covered calls and anticipated that I would collect $1.90/share.

On February 4th I wrote May 2018 $155 calls at $2.15/share. Given the number of contracts (each contract consists of 100 shares) involved I was able to generate much more option income than I originally anticipated.

I have also written:

  • NKE April 2018 $87.50 option premium $1.35/share
  • MA April 2018 $230.00 option premium $2.43/share

The NKE and MA shares are held in the FFJ Portfolio so subscribers to this site will see the number of option contracts I sold when I provide my February 2019 FFJ Portfolio update.

The ADP shares are held in an undisclosed account so I will not be disclosing the number of option contracts I initiated today.

Suffice it to say that the aggregate of the premiums collected from these 3 trades pretty much covers the total cost of my upcoming 10 day Whistler/Blackcomb ski trip. I say this solely for the purpose of demonstrating how a conservative option strategy can generate additional income which you can then deploy as you see fit.

Final Thoughts

Several companies in which I hold shares are scheduled to release their earnings and guidance and to announce dividend increases in the month of February. I prefer to wait until this information has been disseminated so I can make an informed assessment as to whether my conservative option strategy can once again be employed.

I wish you much success on your journey to financial freedom.

Thanks for reading!

Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to [email protected].

Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.

Disclosure: I am long NKE, MA, ADP, MSFT, BDX, SJM, CVX, HSY, KFY, and V.

I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.