In the current market environment, investors might be more interested in generating income rather than capital gains.
Today, we’re looking at two covered call examples on Bank of America stock. The first step to finding our covered call candidates is to use the Stock Scanner with the following parameters:
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Which produces the following results:
Bank of America (BAC) is up 13.61% in the last three months and is currently showing a dividend yield of 2.08%. The stock also has a high IV Percentile which means options are expensive compared to the recent past.
Using options, we can generate an additional income from high yielding stocks via a covered call strategy.
BAC Covered Call Example
Let’s look at two different covered call examples on BAC stock. The first will use a monthly expiration and the second will use a seven-month expiration.
Let’s evaluate the first BAC covered call example.
Buying 100 shares of BAC would cost around $5,442. The July 17, 55-strike call option was trading yesterday around $1.84, generating $184 in premium per contract for covered call sellers.
Selling the call option generates an income of 3.5% in 38 days, equalling around 33.6% annualized. That assumes the stock stays exactly where it is. What if the stock rises above the strike price of 55?
If BAC closes above 55 on the expiration date, the shares will be called away at 55, leaving the trader with a total profit of $242 (gain on the shares plus the $184 option premium received). That equates to a 4.6% return, which is 44.2% on an annualized basis.
Instead of the July 17 call, let’s look at selling the December 55-strike call instead.
Selling the December 55-strike call option for $4.25 generates an income of 8.5% in 192 days, equalling around 16.1% annualized.
If BAC closes above 55 on the expiration date, the shares will be called away at 55, leaving the trader with a total profit of $483 (gain on the shares plus the $425 option premium received).
That equates to a 9.6% return, which is 18.3% on an annualized basis.
These figures don’t include any potential dividends received during the course of the trades.
Of course, the risk with the trade is that the BAC might drop, which could wipe out any gains made from selling the call.
Barchart Technical Opinion
The Barchart Technical Opinion rating is a 24% Buy with a Average short term outlook on maintaining the current direction.
Implied volatility is at 29.38% compared to a 12-month low of 19.85% and a 12-month high of 39.28%.
The next earnings release is set for July 14th.
Company Description
Bank of America Corp. is one of the largest financial holding companies in the U.S.
It has 5 business units: Consumer Banking, comprising Deposits & Consumer Lending businesses, provides credit, banking and investment products and services.
Global Wealth & Investment Management, comprising Merrill Lynch Global Wealth Management and U.S. Trust, Bank of America Private Wealth Management, offers wealth structuring, trust and banking needs and specialty asset management services.
Global Banking, including Global Corporate Banking, Global Commercial Banking, Business Banking and Global Investment Banking, provides lending-related products and services, integrated working capital management and treasury solutions, and underwriting and advisory services.
Global Markets offers sales & trading, market-making, financing, securities clearing, settlement and custody, and risk-management services.
All Other comprises ALM activities, equity investments, the international consumer card business, liquidating businesses, etc.
Of the 26 analysts following the stock, 16 rate it as a Strong Buy, 5 as a Moderate Buy and 5 as a Hold.
Covered calls can be a great way to generate some extra income from your core portfolio holdings.
Please remember that options are risky, and investors can lose 100% of their investment. This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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