How to Sell Covered Calls to Create Portfolio Yield

options terminology: What are Options in Investing?

Selling covered calls is a great way to create yield in a near-zero interest rate environment. Here’s how to do it.

With the global economy in the gutter it is becoming more and more apparent the Federal Reserve is going to be patient in raising interest rates for years to come. Because of this monetary policy, it’s still a challenge for savers to create yield. That said, there is an alternative way to create yield against your stock holdings: sell covered calls, which is exactly the strategy we use at Cabot Profit Booster.

How to Sell Covered Calls

A covered call is an options trading strategy in which the trader holds a long position in a stock and sells a call option on the same stock in an attempt to generate income. For example, if I owned 100 shares of Apple (AAPL) I could sell one call against my 100 shares. And when I sell that call I collect a premium (essentially collecting an insurance premium).

Earlier this year me and fellow Cabot analyst Mike Cintolo combined our strengths, Mike’s ability to spot promising stock charts and stories with my covered calls prowess, to create Cabot Profit Booster. And five months in to the launch of Profit Booster this strategy is working very well to reduce risk, and to create yield.

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Here is an example of a covered call trade alert that we executed at Cabot Profit Booster last month using a stock idea and analysis by Mike, combined with my covered call idea.

The Stock – CrowdStrike (CRWD)

Despite the self-induced recession, the stay-at-home economy is booming thanks to companies that are letting employees work from home—and even after things go back to normal, it’s likely some of this new workplace flexibility will be here to stay. Helping keep the cloud secure is CrowdStrike (CRWD), which facilitates endpoint detection and protection on or off networks, as well as on major platforms such as Google Cloud and Microsoft Azure.

Using crowdsourced data from users, it deploys artificial intelligence to predict whether a threat is malicious or not and its services span beyond security into “systems hygiene,” which allows clients to see who’s on their network and what applications they’re using, as well as how user accounts are being accessed.

CrowdStrike has been growing rapidly for a while, but the stock has perked up due to expectations of continued excellent results thanks to the world’s new reality. CrowdStrike’s revenues are mostly subscription-based, and this metric was up by an eye-popping 99% last year. For the latest quarter, subscription revenue (+90%), annualized recurring revenue (+92%, up to $600 million at year-end) and subscription gross margin (+77%) also grew impressively. Despite negative earnings, the company was cash flow positive in Q4.

Best of all, once companies go with CrowdStrike, they don’t leave (98% retention rate) and tend to add a lot more services over time (same-customer revenue growth of 24% in Q4). Looking beyond the pandemic, CrowdStrike is definitely one of the leaders in the “new-age” cybersecurity sector, as firms need new solutions to deal with the move of their systems and apps to the cloud.

Technical Analysis

After a post-IPO rally to 100 last summer, CRWD was cut in half by October and really couldn’t get off its knees, even as the market went nuts through February. The COVID-19 panic resulted in a huge break of support, but what’s been impressive has been the rebound—CRWD exploded off the bottom on two weeks of huge trading volume, and after some tightness in the 60 area, it’s extended to multi-month highs. We suggest aiming for a bit of a pullback and using a loose stop. Stop – 56

Learn how to sell covered calls in CrowdStrike (CRWD).The Covered Call Trade

Buy CrowdStrike (CRWD) Stock at 69, Sell to Open June 70 Calls (exp. 6/19/2020) for $6, or a Net Price of 63 or less.

Static Return: $600 per covered call (9.52%)

Break-even: 63

Covered Call Return (if assigned): $700 per covered call (11.11%)

The above trade idea is a perfect example of what you get at Cabot Profit Booster every Tuesday morning, along with access to me via email if you are new to this strategy, or if you have any general questions about how to sell covered calls.

To learn how to become a Cabot Profit Booster subscriber, click here.

Jacob Mintz

Quick Profits, Controlled Risk

Jacob Mintz is a professional options trader and Chief Analyst of Cabot Options Trader. He uses calls, puts and covered calls to guide investors to quick profits while always controlling risk. Beginners and experts alike can gain from following Jacob’s advice.

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Comments

  • Jacob M.

    Correct. As I said, “For example, if I owned 100 shares of Workday (WDAY) I could sell one call against my 100 shares.”

  • Ernest L.

    Be careful and don’t do this unless you have at least 100 shares, and then only in 100-share increments. One options contract is for 100 shares.

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