Take Advantage of the High Flying Market
This market is a great opportunity to write covered calls.
The market indexes continue to soar to new all time highs with no signs of stopping, despite the fact that the virus is still hanging around and economy is still beaten up. The market sees a strong recovery ahead, a friendly Fed and a likely vaccine by the end of the year or shortly thereafter.
But investors are likely to take a fresh look at things after Labor Day as they shake off the malaise of late summer and refocus. The sobered-up investor will see a market that has run up 58% in a little over five months. They will gauge a market at all time highs amidst an uncertain environment.
The virus is unpredictable and there is no guarantee of a vaccine. The election is coming into focus and there is a possibility of a contested result. Today’s hugely dividend political parties probably wouldn’t handle that too well.
I believe in the economy. I’m also bullish on the market longer term. But there is a good chance of a pullback or at least a consolidation in the months ahead. It therefore makes a lot of sense to seize the moment while the market is still drunk on euphoria to lock in high call premiums.
In this update I highlight two covered call opportunities on existing portfolio positions Starbucks (SBUX) and Brookfield Infrastructure Partners (BIP).
Stock Portfolio Recap
AbbVie Inc. (ABBV) Yield 5.1%—The drug maker had a bad day yesterday, down almost 4%. AbbVie is being subpoenaed by a U.S. House panel for allegedly not responding to requests for information during their drug-pricing investigation. This kind of attention is never good and it also highlights the risk of price control legislation in the future. However, it doesn’t change my high opinion of the stock as the company has a killer pipeline and sells at a cheap valuation ahead of the huge tailwind of an aging population. It’s also a good entry point. BUY
Altria (MO) Yield 7.9%—At the very least, this should be a good high income stock. The dividend is rock solid and the stock is already beaten to a pulp. But there is a good chance the stock rises to the occasion, as it always has in the past, and provides some solid appreciation as well. In fact, it has already started trending higher. It a good bet with the market as high as it is. BUY
Brookfield Infrastructure Partners (BIP) Yield 4.4%—The stock is doing okay but not exactly lighting the world on fire of late. Part of the reason is that the market has been shunning a lot of the dividend stocks. But I like the way this stock is set up approaching Labor Day. It’s cheap while the market is high and offers a great way to play defense as uncertainty in the market rises in the months ahead. BUY
Enterprise Product Partners (EPD) Yield 10.1%—I don’t want to talk about what a great value this stock is again this week. The market just doesn’t seem to care. When will the market show EPD some love? I don’t know. But it’s hard to see the stock having much downside at this level. And that monster 10% yield is safe and will be paid. If nothing else, you’ll get a double digit income just holding this stock. But I will continue to look for the opportunity to write a call and enhance that return. BUY
Innovative Industrial Properties (IIPR) Yield 3.5%—The marijuana farm REIT has been killing it, up about 40% since mid July. Such a move is justified as the company has enormous growth. Remember, this stock was 130 last year (currently 124). But the turbulent market had been giving the stock a hard time; first because the marijuana sector was under siege and then because the turbulent market shunned a sexy stock like IIPR. But it is thriving in this phase of the rally. It could still go high and make new highs. But it is also volatile with the overall market and could come back down in a correction. HOLD
Qualcomm inc. (QCOM) Yield 2.1%—This is another stock is breaking out and running away. It’s hard to say how high it will go. It always had the revenue boost from 5G smart phone royalties in the coming quarters. But the settlement with Huawei has changed the math. This and other legal issue regarding the licensing business had been holding the stock back. With that impediment likely removed, or at least the outlook vastly improved, the stock should be off to the races. HOLD
Starbucks (SBUX) Yield 1.9%—Despite the high market, this is a gem that is still reasonably priced. The pandemic will end and people will flock back to Starbucks. In the meantime, the company has done a fantastic job growing its drive-thru and delivery business. After the pandemic, the company will be in even better shape than it would have been without the pandemic. The stock has good momentum and this is a good opportunity to write a call while the market is soaring ahead of the Labor Day refocus. BUY
U.S. Bancorp (USB) Yield 4.6%—This is a fantastic bank, and a great contrarian pick at a time when bank stocks are out of favor. At the very least, the stock wallows around the same level and pays a good dividend, along with the call premium written on the shares. But the economic recovery could be kind to the stock in terms of price appreciation as well. BUY
Valero Energy (VLO) Yield 7.5%—This refiner is a bet on a strong recovery in the quarters ahead. The economy will demand more gas, diesel and other refined products as the economy gains traction, and Valero will surely benefit. It isn’t moving yet. But it’s a great time to lock in a high 7.5% yield ahead of what should be much better days in the quarters ahead. BUY
Call Trades
QCOM September 18 $95 call at $4.30
As I mentioned above, the stock is running away. With a current price of 122, the stock is leaving that $95 strike price in the dust. The stock will likely be called away at expiration in a couple of weeks. That’s okay. It will happen periodically as you write calls. But you will still get a double-digit return in a short amount of time for your troubles.
ABBV September 18 $100 call at $4.60
It looks like we got this call near the short-term peak for the stock. It seems unlikely that ABBV with gather enough momentum in the next couple of weeks to move past 100, currently 92.62. It’s a great company and a great stock and there will be more opportunities to write more calls and ring the register in the future.
USB September 18 $37.50 call at $2.00
The stock is gaining traction and moving close to the 37.50 strike price, currently 37.26. We’ll see how the market and the stock behave after Labor Day as investors refocus on the surging market. Even at the higher price, the calls are only selling at half the targeted price above because they have lost so much time value. We will either get to keep the stock and write more calls in the future or get a great return in a short time with the price appreciation and the call premium.
IIPR September 18 $100 call at $5.00
This stock is also running away big time. The current 124 price is way over the 100 strike price. But it could come back in the next couple of weeks if the market sells off. We wrote two calls on the stock and collected a dividend so far. Combined with the appreciation it will provide a better than 25% total return if the stock is called away.
If you own the stock at a lower price and did not write the calls you can still do so at the price of around $25. That way you can effectively lock in the appreciation even if the stock moves lower. It’s a massive premium that will be a huge coup if the market sells off and the stock comes back down in September.
Special Alerts
Sell SBUX October 16 $87.50 call at $3.30 or higher
Expiration date: October 16th
Strike price: $87.50
Call price: $3.30 or higher
The stock price has moved up to a current 86.66 from the buy price last week of 82.41. It has good momentum and call premiums are rising. The returns below will assume the 82.41 purchase price. Here are the three main scenarios.
- The stock goes above 87.50
- Call premium: $3.30
- Appreciation: $4.25 ($87.50 strike price minus $82.41 purchase price)
- Total: $7.55 (total return will be 9.16% in six weeks)
- The stock price stays the same
- Call premium: $3.30
- Total: $3.30 (total return will be 4.0% in six weeks)
- The stock price declines
- You will be down by however much the stock is down less the $3.30 from the call. And the position will live to pay more dividends and write more calls in the future.
Sell BIP October 16 $45 call at $1.95 or higher
Expiration date: October 16
Strike price: $45
Call price: $1.95 or higher
The stock price has moved higher to 45.65 per share since being purchase on June 24th at 42.64. The returns will assume the 42.64 purchase price. The call are in-the-money slightly but the call premium and the possibility of volatility in September make it worthwhile.
- The stock goes above $45
- Call premium: $1.95
- Dividend: $0.485 (the pay date is September 30th)
- Appreciation: $2.34 ($45 strike price minus $42.64 purchase price)
- Total: $4.78 (total return will be 11.2% in less than 4 months)
- The stock price stays the same
- Call premium: $1.95
- Dividend: $0.485
- Total: $2.44 (total return will be 5.7% in less than 4 months)
- The stock price declines
- You will be down by however much the stock is down less the $2.44 from the dividend and the call. And the position will live to pay more dividends and write more calls in the future.