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My 3 Favorite Option Trade Candidates for 2021

My 3 Favorite Option Trade Candidates for 2021

Posted On January 6, 2021 3:25 pm
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Last week, I spoke about how the market is presenting a unique situation for covered call positions, thanks to an unusual options pricing structure with traders paying higher-than-normal premiums for upside call options. 

Today, I’d like to take a less wonky approach and identify three of my favorite covered call candidates based on the companies’ longer prospects for both capital appreciation and dividend yields rather than near-term option pricing. 

As a quick review, covered calls are the simultaneous ownership of underlying shares with the sale or short call option position. Generally speaking, the call sale generates premium collection, creating yield even on a static stock price. It also lowers the effective underlying share cost basis.  If calls are written on an ongoing basis, or ‘rolled’ with regularity, you can achieve an ongoing incoming stream. 

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If you couple this with a stock paying a consistent dividend, the annual yield can be north of 20% in even the most blue-chip or staid companies. Basically, you’re paid to be patient. 

There’s a Wall Street term ‘Dividend Aristocrats’ used to describe companies that have consecutively increased their dividend for 25 consecutive years. It currently contains 66 names filled with tried-and-true blue-chip such as Wal-Mart (WMT) and Coca-Cola (KO).  Over the last 10 years, dividend-based ETFs such as Proshares Dividend Aristocrat (NOBL), have cropped up to deliver income for a yield-starved world. 

What I’d like to present to you is three of what I refer to as the “Young Aristocrats”; companies that have raised dividends for a minimum of 5-10 years and that are also enjoying strong revenue and profit growth. These are the stocks that use covered calls and should deliver capital appreciation and increasing dividend yields.  They represent three different sectors and can be the building blocks for a solid long-term portfolio. 

1.Agilent Technologies (A)  is a technology company focused on healthcare, providing diagnostic equipment and software for analyzing cell imaging, DNA, and gene profiling.  

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The stock has been in a steady upward trend, gaining above 350% over the past five years, breaking out to a new all-time high today.  It has been paying a dividend for the past 9 years and currently yields 0.9%.  One can sell calls with 30 days until they’re 10% out-of-the-money to generate an additional 27% yield on an annualized basis. 

2.Skyworks Solutions (SWKS) manufactures semiconductor products used in everything from auto and aerospace to smartphones and gaming devices.  It has increased its dividend for the past seven years with a current yield of 1.31%.  Selling a 30-day call, which is 10% OTM, would boost income annually to 18%.

3.Charles Schwab (SCHW) is a leading full-service financial firm offering banking, trading, wealth management, and prime brokerage services.  It currently has over $ trillion in assets and has seen its market share grow dramatically with the sector rapidly consolidated over the past five years. SCHW has increased its dividend for the past 5 years and currently yields 1.42%.  By selling a 30-day call option 10% OTM, you can boost income to 29% on an annualized basis. 

The three above-mentioned companies should continue boosting dividends for years to come while also seeing share price appreciation. 

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About author

Steve Smith
Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.

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