The market conditions we are getting at the moment are perfect for income investors. Volatility spikes (VIX now trading just below 20) when we have sharp moves in the stock market. This is what we want as income investors so we can maximise income from our covered calls. Yesterday we had automatic orders taken out of the market for profit in McDonalds, Kellogg & Chevron for a total of $102 ( if you had sold one covered call in each underlying -see screen-shot below). As I write in premarket (01-13-2015), the S&P500 is up 0.4% so many of these underlyings will be positive today so we may again have the opportunity to sell covered calls in these and other underlyings. The beauty of covered call selling is that we still collect dividends as long as our underlyings are not called away from us. Its time to start ramping up our portfolio so we are going to put more capital to work.
Earnings season has just kicked off and we are going to try and pull in some income for the 1% portfolio by adding Wells Fargo (NYSE:WFC) to our portfolio. Wells Fargo announces earnings tomorrow before the bell. I have no problem recommending this stock for the 1% portfolio. It has a PE ratio of 12.75 and it has consistently raised its dividend aggressively throughout its history. This bellwether stock which is the US’s biggest bank has weathered financial storms before and come through unscathed. Look at the chart below to see its action over the last 5 years and especially observe how it has raised its dividend (what income investors are looking for).
The beauty of earnings is that usually there is a big move in either direction. There are a number of ways you can play earnings. Some investors like to wait for a pullback after earnings before they buy a bellwether stock. However to make money in the market, we need to be invested in the market. The nature of these bellwether stocks implies they have more positive earnings than negative. Therefore we are going to buy 100 shares at $52.3 (current price) and sell the Feb27th-54-Call for $0.57 (Covered Call). If the stock goes north after earnings, we will make the capital gain of $2 per share and also the option. If the stock sells off, we will be profitable on our covered call and then wait for our underlying to come back to even.
As I had anticipated our equity underlyings are all positive today (S&P up 25 points) so we are going to take advantage of the up move by selling covered calls. (see screen-shot below of our 50%GTC orders already in place to lock in profit)
The market action we have had recently enables income investors make huge gains. I hope now you see the benefit of taking profits on your covered calls at 50%. When the market moves like this, we can trade up to 5 covered call trades a month on the same underlying instead of 1 ( which was done traditionally)
Just one final note. We do not put in a GTC order for our earnings play on Wells Fargo . Earnings announcements are always volatile and if the stock goes in our direction, the covered call will be a full winner as it is only 3% above our entry price.