March Covered Calls

I've analyzed the highest-volume 200 stocks priced between $5 and $20 to identify some reasonable covered call prospects for March. This week is prime time for the covered calls that expire March 19.

This time around I used fundamentals as a screening tool, something I haven't done so much in the past. But with the broad market having broken out of it's uptrend, I've gotten more cautious about owning shares that might head south, sticking me with yet another zombie position.

For this scan, I used the InvesTools scoring method for both the financials. There are many other ways to do it, whether you look at the trend of quarterly earnings or analyst rankings on one of the free finance sites, or some other method that gives you a comfort zone.

Altogether I came up with 11 possible trades, and I like six of them a lot.

With 200 issues in my screening universe, I need some way to cut down the pool, and the fundamentals seem to be a good way to do an initial selection. Afterwards, I look at the near in-the-money option, and calculated the return on the option alone of it expires without being exercised, or the on the stock and option combined if the option is exercised. I also took at look at dividends, since it's a plus to have dividend-paying stock in your portfolio if the price falls too low to reasonably sell a covered call against the shares. In my analysis, I reject out of hand positions where the return if exercised would result in a loss. I also reject positions with earnings reports prior to the March 19 expiry. And I reject positions that are in a down trend (admittedly a somewhat subjective decision, but I know what I like.) Uptrending or sideways prices are still considered.

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After that, it's a case of finding the maximum value for both exercised and not-exercised returns.

Here are my findings:

• AMR, trading for $8.71, strike 8, return if expired 12.3%, if exercised, 4.1%, ratio expired return to exercised return 3:1
• CAL, $19.67, strike 19, expired 9%, exercised 5.5%, ratio 1.6:1
• JBLU, $5.17, strike 5, expired 8.7%, exercised 5.4%, ratio 1.6:1
• GCI, $14.29, strike 14, expired 7.7%, exercised 5.7% , ratio 1.4:1, dividend 1.12% (Uptrend is a bit sketchy)
• SWKS, $13.87, strike 12.5, expired 11.5%, exercised 1.7%, ratio 7:1
• FITB, $11.61, strike 11, expired 9%, exercised 3.8%, ratio 2.4:1 div 0.34%
• PTEN, $16.41, strike 15, expired 10.7%, exercised 2.1%, ratio 5.2:1, div 1.22%
• STX, $18.70, strike 18, expired 7.4%, exercised 3.6%, ratio 2:1
• NWSA, $13.11, strike 12.5, expired 6.5%, exercised 1.8%, ratio 3.5:1, div 1.14% (Sketchy uptrend)
  
• NYB, $15.60, strike 15, expired 5.5%, exercised 1.6%, ratio 3.4:1, div 6.41%

So, what to make all of this. Best of all I like big returns with a narrow ratio, meaning I win either way. A smallish dividend is a plus, a large one not so much because it casues large price swings.

My favorites here are AMR, CAL, JBLU, GCI, FITB and STX. Good returns, small spread.

GCI and FITB get a very tiny extra point for their dividends, but frankly, they're so small as to not matter.



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Topics:
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