Written by Fastball
June 29, 2012
With July options expiration three weeks away, it is time to start putting on our positions for the month. Still lots going on in the market and we have to be careful with our positions because earnings announcements will start around options expiration time.
We’re going to start July with a couple of simple trades: a Lockheed Martin covered call and an Apple put spread like we did last month.
We’ll start by adding another covered call to our portfolio. With McDonald’s, Microsoft and Intel covered calls already on the books, this makes us a little heavy on that strategy, but we can remedy that as the options expire in the coming months. We wrote about Lockheed Martin (LMT) last week, so I won’t cover the stock itself here. Let’s focus entirely on the covered call strategy.
Lockheed Martin currently has a 4.73% dividend yield. Since the next dividend date should be near the end of August, we are going to use September expiration calls to maximize our income. Here’s the trade:
This trade produces dividend income of $1.02 and option income of $1.10 for a total income of $2.12 or 2.5%. So, if we trade this 4 times a year, we would have 10% income. That’s nothing amazing, but it’s relatively stable and provides good downside protection on owning the stock as well. A good scenario would be if the stock rallied up or over the $90 strike price by mid-September because we would get the capital appreciation as well. That would add a 4% capital gain and bring our total income for the 3 month trade to 6.5%!
However, the best scenario would be for LMT to steadily climb higher over multiple years, thereby allowing us to put on covered calls with increasingly higher strike prices. That would give us our 10% income from dividends and option premium, but would also produce huge capital gains for us to take whenever we’d like. But that’s not all, since LMT consistently increases its dividend each year, that means that the 10% income for us would steadily increase as well.
We’re going back to an old friend again this month for another put spread. This trade should look familiar since we did this last month as well.
This Put Spread trade has 2 legs:
This produces a net $462 and puts $3,038 at risk. We are setting aside $10,000 in our portfolio for this trade. So this produces a 4.6% income on our $10,000 we set aside and a 15.2% return on the money we are putting at risk. In order to get our $462 maximum return, AAPL must be above $550 at the end of the day on Friday July 20th. The stock now sits at $580. That means we have a 5.1% cushion on the downside.
That’s all for now. More likely to come next week!