One problem of selling calls on quality stocks is that when they are called away at your strike price, quite often their stock prices continue to go up and you lose that opportunity.
The other problem with selling calls on even quality stocks is that you are stuck with the stock until the expiration even if the stock price is sinking.
Our current market makes clear the second risk pre-empts the first. Readers know I work my portfolio with calls. Often times I am in and out of stocks once or twice a year. I am unafraid of each risk noted above because I try to pick quality stocks.
I added a small amount of two quality stocks Wednesday and immediately sold calls on them. One stock carries a low dividend yield but all other Dividend Machine fundamentals are in order. The other stock carries a high dividend yield and has a little more debt than I like, but I believe it is a quality stock that will continue to pay their big yield.
I like to get a minimum of 10% total return; capital gain, call premium, and dividend; when I buy a few more shares and sell a call for no other reason than to reap income. Here are my two trades today.
Dividend fundamentals include earnings of $4.50 are greater than dividend of $1.84 and debt to equity ratio of .77. Negative is low yield of 1.47%.
Dividend fundamentals include earnings of $9.50 are greater than dividend of $6.48. Debt to equity ratio is 3.03 and that is a negative, but it is offset by a dividend yield of 5.01% with plenty of cash flow to pay it.
Nibbling for income.
Disclosure: Long MSFT and IBM with calls
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.