This is a great time to sell covered calls.
The recent upward movement in the market increases upside speculation, and call premiums have risen. It’s a great time to take advantage of the recent surge in certain stocks to secure a high-income return. Even if the stock gets called, you are taking profits in a very high market ahead of what is likely a choppier environment.
In this issue, I highlight a covered call on the recently red-hot Qualcomm (QCOM). The stock soared 50% in a little over a month but has leveled off in recent days. It’s a great time to secure a huge call premium and lock in a huge income to go along with recent appreciation.
Market Overview
Normal Days are Here Again
This great and epoch market recovery might be finally running out of gas.
The S&P 500 is up over 100% since the bottom in March 2020. That means the market has gained as much value since that bottom as it had accumulated from the beginning of time until March of last year. It’s also up about 40% from the high before the pandemic and 10% just since early October.
Such returns simply cannot continue. The pace must at least slow down from here. Stellar earnings have saved this bull run of late. But the excitement is fading. As the market slows down, it may not be able to outrun the lingering problems.
Inflation isn’t going away. In fact, it is continuing to get worse. Supply problems aren’t improving either. At the same time, the Fed will soon pull back on stimulus by tapering its bond buying and raising the Fed Funds rate, probably sooner than previously anticipated, to counter the growing inflation.
The economy is booming, and earnings are terrific because the slack from the pandemic is being picked up. Business is making up for lost time. But once that slack is gone, economic and earnings growth will return to normal, whatever that is these days.
That isn’t to say that we are heading for a bear market. In fact, we are likely still in a secular bull market that should continue for years. It’s just highly likely that we will face a much choppier market with smaller returns going forward. That’s OK. It will be normal and healthy for the market to slow down.
A more sober market puts income at a premium. This advisory will continue to generate strong income returns even when the market isn’t flying.
What to Do Now
This is a great time to sell covered calls.
The recent upward movement in the market increases upside speculation, and call premiums have risen. It’s a great time to take advantage of the recent surge in certain stocks to secure a high-income return. Even if the stock gets called, you are taking profits in a very high market ahead of what is likely a choppier environment.
There are three existing covered calls in the portfolio for positions in ONEOK (OKE), KKR & Co. (KKR) and One Liberty Properties (OLP). There is another call highlighted below for the recently red-hot Qualcomm (QCOM) and a call that expired last Friday for U.S. Bancorp (USB).
There will likely be more covered calls recommended in the near future. Please keep an eye out for “Trade Alerts” in your email as well as weekly updates and monthly issues.
Although I’m expecting a more sideways market in the year ahead, inflation is weird. It might be a negative for the overall market, but certain stocks actually benefit. Inflation beneficiaries include energy stocks Valero Energy (VLO), ONEOK (OKE) and Enterprise Product Partners (EPD), as well as financial stocks U.S. Bancorp (USB) and KKR & Co. (KKR). It should also benefit real estate stocks including One Liberty Properties (OLP).
EPD and VLO are currently BUY rated.
Monthly Recap
October 27
Sold KKR December 17 $75 calls at $3.50 or better
Purchased FS KKR Corp. (FSK) - $22.01
November 17
Purchased Valero Energy (VLO) - $73.25
November 19
USB November 19 $60 calls at $2.30 - Expired
Sold OLP February 18 $35 calls at $1.50 or better
November 24
Sell QCOM January 21 $185 calls at $9.65 or better
Featured Actions
Featured Action
Sell QCOM January 21 $185 calls at $9.65 or better
Sell QCOM January 21 $185 calls at $9.65 or better
Expiration date: January 21
Strike price: $185
Call price: $9.65
Qualcomm Inc. (QCOM)
Qualcomm stock just had a great run. After pulling back on fears of contagion from Chinese real estate company Evergrande’s default, QCOM has soared more than 25% in just the last few weeks. As contagion fears waned, the stock made up for lost time. It’s also up over 85% YTD and may be on the high side of the range. It’s a good time to lock in a high income and possibly a big total return after the stock has had a surge.
Here are the three scenarios.
- The stock closes above the $185 strike price at expiration
Call premium: $9.65
Dividends: $2.04 (6/24, 9/23, 12/16)
Appreciation: $50.35 ($185.00 strike price minus $134.65 purchase price)
Total: $62.04 (total return will be 46.1% in six and a half months)
- The stock price closes below our $185 strike price.
Call premium: $9.65
Dividends: $2.04
Total: $11.69 (total income return of 8.7% in 6.5 months)
- The stock price declines.
The decline will be offset by the $11.69 in income. Of course, the stock price is already more than $50 per share above the price at which it was added to the portfolio.
Portfolio Updates and Income Calendar
Portfolio Updates
| CIA STOCK PORTFOLIO | |||||||
| Open Recommendations | Ticker Symbol | Entry Date | Entry Price | Price on 11/22/21 | Buy at or Under Price | Yield | Total Return |
| AGNC Investment Corp. | AGNC | 1/13/2021 | 15.52 | 16.04 | 17.00 | 8.98% | 11.08% |
| Enterprise Product Partners | EPD | 3/17/2021 | 23.21 | 22.01 | 25.00 | 8.18% | 0.82% |
| U.S. Bancorp | USB | 3/24/21 | 53.47 | 58.98 | 57.00 | 3.19% | 12.81% |
| Qualcomm Inc. | QCOM | 5/5/21 | 134.65 | 181.40 | 140.00 | 1.47% | 36.03% |
| ONEOK, Inc. | OKE | 5/26/21 | 52.51 | 61.94 | 60.00 | 6.04% | 21.85% |
| One Liberty Properties, inc. | OLP | 7/28/21 | 30.37 | 34.31 | 33.00 | 5.14% | 14.62% |
| KKR & Co., Inc. | KKR | 8/25/21 | 64.52 | 78.30 | 70.00 | 0.74% | 21.58% |
| Xcel Energy Inc. | XEL | 10/12/21 | 63.00 | 66.31 | 67.00 | 2.81% | 5.25% |
| FS KKR Capital Corp. | FSK | 10/27/21 | 22.01 | 21.25 | 24.00 | 11.75% | -3.45% |
| Valero Energy Corp. | VLO | 11/17/21 | 73.45 | 70.65 | 85.00 | 5.68% | -2.53% |
| EXISTING CALL TRADES | |||||||
| Open Recommendations | Ticker Symbol | Intial Action | Entry Date | Entry Price | Price on 11/22/21 | Sell To Price or Better | Total Return |
| OKE Nov 26 $65 call | OKE211126C00065000 | Sell | 10/20/21 | 2.25 | 0.08 | 2.25 | 4.28% |
| KKR Dec 17 $75 call | KKR211217C00080000 | Sell | 10/26/21 | 3.50 | 5.00 | 3.50 | 5.42% |
| OLP Feb 18 $35 call | OLP220218C00035000 | Sell | 11/19/21 | 1.50 | 1.50 | 1.50 | 4.94% |
| QCOM Jan 21 185 call | QCOM220121C00185000 | Sell pendng | 7.35 | 9.65 | |||
| SOLD STOCKS | |||||||
| Security | Ticker Symbol | Action | Entry Date | Entry Price | Sale Date | Sale Price | Total Return |
| Innovative Industrial Props. | IIPR | Called | 6/2/20 | 87.82 | 9/18/20 | 100.00 | 15.08% |
| Qualcomm | QCOM | Called | 6/24/20 | 89.14 | 9/18/20 | 95.00 | 7.30% |
| U.S. Bancorp | USB | Called | 7/22/20 | 36.26 | 9/18/20 | 38.00 | 3.42% |
| Brookfield Infras. Ptnrs. | BIP | Called | 6/24/20 | 41.92 | 10/16/20 | 45.00 | 8.49% |
| Starbucks Corp. | SBUX | Called | 8/26/20 | 82.41 | 10/16/20 | 88.00 | 6.18% |
| Visa Corporation | V | Called | 9/22/20 | 200.56 | 11/20/20 | 200.00 | 0.00% |
| AbbVie Inc. | ABBV | Called | 6/2/20 | 91.04 | 12/31/20 | 100.00 | 12.43% |
| Enterprise Prod. Prtnrs. | EPD | Called | 6/24/20 | 18.14 | 1/15/21 | 20.00 | 15.16% |
| Altria Group | MO | Called | 6/2/20 | 39.66 | 1/15/21 | 40.00 | 7.31% |
| U.S. Bancorp | USB | Called | 11/25/20 | 44.68 | 1/15/21 | 45.00 | 1.66% |
| B&G Foods Inc, | BGS | Called | 10/28/20 | 26.79 | 2/19/21 | 28.00 | 4.42% |
| Valero Energy Inc. | VLO | Called | 8/26/20 | 53.70 | 3/26/21 | 60.00 | 11.73% |
| Chevron Corp. | CVX | Called | 12/23/20 | 85.69 | 4/1/21 | 96.00 | 12.95% |
| KKR & Co. | KKR | Called | 3/24/21 | 47.98 | 6/18/21 | 55.00 | 14.92% |
| Digital Realty Trust | DLR | Called | 1/27/21 | 149.17 | 7/16/21 | 155.00 | 5.50% |
| NextEra Energy, Inc. | NEE | Called | 2/24/21 | 73.76 | 9/17/21 | 80.00 | 10.00% |
| Brookfield Infras. Ptnrs. | BIP | Called | 1/13/21 | 50.63 | 10/15/21 | 55.00 | 11.65% |
| EXPIRED OPTIONS | |||||||
| Security | In/out money | Sell Date | Sell Price | Exp. Date | $ Return | Total % Return | |
| IIPR Jul 17 $95 call | out-of money | 6/3/20 | 3.00 | 7/17/20 | 3.00 | 3.40% | |
| MO Jul 31 $42 call | out-of-money | 6/17/20 | 1.60 | 7/31/20 | 1.60 | 4.03% | |
| ABBV Sep 18 $100 call | out-of-money | 7/15/20 | 4.60 | 9/18/20 | 4.60 | 5.05% | |
| IIPR Sep 18 $100 call | in-the-money | 7/22/20 | 5.00 | 9/18/20 | 5.00 | 5.69% | |
| QCOM Sep 18 $95 call | in-the-money | 6/24/20 | 4.30 | 9/18/20 | 4.30 | 4.82% | |
| USB Sep 18 $37.50 call | in-the-money | 7/22/20 | 2.00 | 9/18/20 | 2.00 | 5.52% | |
| BIP Oct 16 $45 call | in-the-money | 9/2/20 | 1.95 | 10/16/20 | 1.95 | 4.65% | |
| SBUX Oct 16 $87.50 call | in-the-money | 10/16/20 | 3.30 | 10/16/20 | 3.30 | 4.00% | |
| V Nov 20 $200 call | in-the-money | 9/22/20 | 10.00 | 11/20/20 | 10.00 | 4.99% | |
| ABBV Dec 31 $100 call | in-the-money | 11/18/20 | 3.30 | 12/31/20 | 3.30 | 3.62% | |
| EPD Jan 15 $20 call | in-the-money | 11/23/20 | 0.80 | 1/15/21 | 0.80 | 4.41% | |
| MO Jan 15 $40 call | in-the-money | 11/25/20 | 1.90 | 1/15/21 | 1.90 | 4.79% | |
| USB Jan 15 $45 call | in-the-money | 11/25/20 | 2.00 | 1/15/21 | 2.00 | 4.48% | |
| BGS Feb 19 $27.50 call | in-the-money | 12/11/20 | 2.40 | 2/19/21 | 2.40 | 8.96% | |
| VLO Mar 26 $60 call | in-the-money | 2/10/21 | 6.50 | 3/26/21 | 6.50 | 12.10% | |
| CVX Apr 1 $95.50 call | in-the-money | 2/19/21 | 4.30 | 4/1/21 | 4.30 | 5.02% | |
| AGNC Jun 18 $17 call | out-of-money | 4/13/21 | 0.50 | 6/18/21 | 0.50 | 3.21% | |
| KKR Jun 18 $55 call | in-the-money | 4/28/21 | 3.00 | 6/18/21 | 3.00 | 6.25% | |
| USB Jun 16 $57.50 call | out-of-money | 4/28/21 | 2.80 | 6/18/21 | 2.80 | 5.24% | |
| DLR Jul 16 $155 call | in-the-money | 6/16/21 | 8.00 | 7/16/21 | 8.00 | 5.36% | |
| AGNC Aug 20 $17 call | out-of-money | 6/23/21 | $0.50 | 8/20/21 | $0.50 | 3.00% | |
| OKE Aug 20 $57.50 call | out-of-money | 6/23/21 | $3.50 | 8/20/21 | $3.50 | 6.67% | |
| NEE Sep 17 $80 call | in-the-money | 8/11/21 | $3.50 | 9/17/21 | $3.50 | 4.75% | |
| BIP Oct 15 $55 call | in-the-money | 9./01/2021 | $2.00 | 10/15/21 | $2.00 | 3.95% | |
| USB Nov 19 $60 call | out-of-money | 9/24.2021 | $2.30 | 11/19.2021 | $2.30 | 4.30% | |
AGNC Investment Corp. (AGNC)
Yield 9.0%
The bad news is that this mortgage REIT isn’t going anywhere. It’s been wallowing in the 16 per share range since July. The good news is that the massive 9% yield should be safe. It’s also important to note that since the position was added to the portfolio last January, two calls for $0.50 each have been sold on AGNC. That makes the total yearly income (assuming another call isn’t sold before January) between dividends and call premiums $2.44 ($1.44 in dividends and $1.00 in call premiums), for an income return of 15.7%. There is also a good chance the stock price moves higher in the next several months. BUY
Enterprise Product Partners (EPD)
Yield 8.3%
This stock had been a big disappointment so far. The story for this midstream energy partnership is similar to that of AGNC in that the price doesn’t seem to go anywhere. But the distribution is rock solid. It also sells at a cheap valuation and the energy environment is very good for stocks in the sector. There should be another move to the upside in the months ahead and you can be patient with EPD because it pays you a huge income while you wait around. BUY
FS KKR Capital Corp. (FSK)
Yield 11.7%
The BDC reported earnings that beat expectations on both earnings and revenue. There was a substantial rise in investment income that was largely offset by higher expenses due to increased business and an inflationary environment. The stock pulled back initially but has been trending back higher in the last few days. Results were good but could have been better. It still remains a positive environment for small businesses and I expect some price appreciation to go along with that mammoth yield. BUY
KKR & Co., Inc. (KKR)
Yield 0.7%
After an enormous spike in October, this alternative investing asset manager has cooled off and pulled back. It makes sense. KKR soared 40% in a month. This sort of pullback is typical after such a big surge. It’s down a little over 6% from the high. Business is booming and I still like the stock in the quarters ahead. But it probably got ahead of itself in the near term. Well see if it falls below the 75 per share target price (currently 78.30) at options expiration in about a month. HOLD
One Liberty Properties, Inc. (OLP)
Yield 5.1%
This normally slow-moving industrial REIT really busted a move. OLP rose 12% this month after the market liked the earnings report. I like REITs as the market is poised to normalize and yield becomes more valuable. Also, REITs are good in inflation. OLP is in a higher growth area than most its peers too. It also helps that it pays a healthy yield. This industrial property REIT is a sleeper pick that has grown earnings by an average of more than 20% over the last three years. I like it going forward but the REIT may have gotten ahead of itself in the near term. That’s why it was a good time to sell the calls. BUY
ONEOK, Inc. (OKE)
Yield 5.8%
Energy was hot and now it’s not. The energy sector was on fire in October as oil prices surged amidst strong demand and limited supply. But oil prices have since pulled back and so have energy stocks, including OKE. After soaring 26% in a little over a month, OKE has pulled back 7% from the recent high. That’s OK because we sold calls when the stock was near the high and it also continues to pay dividends. I still like energy and I love OKE going forward. The same pressure that drove oil prices to the highest level since 2014 are still in place and should continue for the foreseeable future. HOLD
Qualcomm (QCOM)
Yield 1.5%
What a month for this 5G chip maker. QCOM soared 40% in the month of November. The earnings report smashed expectations and information in the report portends very good things in the future. The main sticking point for investors was that Apple (AAPL) is developing its own chip and will eventually cut Qualcomm out. But Qualcomm showed that it has other business that can replace Apple when the time comes. That’s why there were a slew of upgrades and higher price targets. The stock finally appears to be cooling off, which is why we are selling a call. BUY
U.S. Bancorp (USB)
Yield 3.2%
This best-in-class regional banking giant lost is mojo after making a new high in October. I still like the prospects going forward as the economy is still strong and interest rates are likely to trend higher in the quarters ahead. I expect another upside move at some point over the next several months. In the meantime, we have been able to milk the recent good fortune for high income by selling calls and collecting dividends. HOLD
Valero Energy Corp. (VLO)
Yield 5.7%
This refiner is a high leverage play on the energy sector. It exaggerates the moves in the overall sector, which has recently been to the downside. That’s why the stock was purchased in last week’s update. It’s a company in the right place at the right time that’s still cheap and should have a lot more upside. VLO is a great inflation hedge that pays a strong dividend to boot. Demand for gasoline and diesel is through the roof and margins are strong. And that situation should last a while. BUY
Xcel Energy Inc. (XEL)
Yield 2.8%
This alternative energy utility stock might finally be getting some traction. It had been wallowing at the low end of the recent range over the last few months but it has been trending higher for the last couple of weeks. This is one of the best utilities out there. Defensive stocks should have their day in the sun as the market and economic environment normalizes into next year with stock prices at very high levels. And Xcel should also be a huge beneficiary of the growth in alternative energy beyond that. Patience should pay off. BUY
Existing Call Trades
Sell USB November 19 $60 calls at $2.30 or better - Expired
The calls expired last Friday but the stock price closed below the target price at 57.59 and the stock was not called. That’s fine because the prospects for USB in the quarters ahead look excellent as the economy is still strong and interest rates should trend higher amidst persistent inflation. We should get a chance to collect more dividends and sell more calls to get even more income from the position.
Here’s the return from the recently expired call and the dividends collected so far.
Call premium: $2.30
Dividends: $1.36
Total: $3.66 (total income return of 6.8% in eight months)
It’s worth noting that we wrote calls on this position this past spring. The calls expired out-of-the-money. If you were a subscriber then and you sold those calls they provided another $2.80 of income from the premium. The total income on the current USB position has been $6.46 for an income return of 12.1% in eight months.
Sell OKE November 26 $65 calls at $2.25 or better
The stock has pulled back recently and is currently below the strike price at 63.24 per share ahead of options expiration on Friday. It now appears likely that the stock will close out-of-the-money and you will keep the shares if you wrote the calls. That’s a good thing. The prospects for the stock remain strong over the next several months and we sell more calls and collect more dividends.
Sell KKR December 17 $75 calls at $3.50 or better
This stock made a huge move and really ran away. It has been pulling back recently, however, and the price is currently 77.50 per share with almost a month to go before options expiration. I believe this stock got ahead of itself in the near term and won’t mind taking a profit if shares are called. If the stock pulls back below the strike price, that’s fine too. We got a great income and should be able to generate more in the future.
Sell OLP February 18 $35 calls at $1.50 or better
We sold these calls at the high point of a recent surge in this normally stodgy stock. It should prove to be good timing. The stock was purchased to generate income above all. So let’s have it. These calls are further out than most in the portfolio because the long time frame is necessary to fetch a fat premium on a stock that tends not to be volatile.
Income Calendar
Ex-Dividend Dates are in RED and italics. Dividend Payments Dates are in GREEN. Confirmed dates are in bold, all other dates are estimated. See the Guide to Cabot Income Advisor for an explanation of how dates are estimated.
The next Cabot Income Advisor issue will be published on December 22, 2021.