How to Yield 14%-Plus on These Stocks

No dividend? No problem. Using a simple options strategy, you can extract short-term income from even non-dividend paying stocks.

The strategy is known as a covered call, and it's blessedly simple. You sell ("write," in options parlance) call options on a stock you own. When you sell the call option, you get paid a premium up front. If the stock has fallen below the option's strike price at expiration, the premium becomes much like a dividend—a way of getting paid for holding your shares. If the shares have risen above the strike price at expiration, you still keep the premium, and you must sell your shares at that price.

In this way, covered calls are a great way to guarantee yourself near-term income, in exchange for giving up some upside if the stock happens to take off in the short term.

Even better, options markets are often less efficient than the markets for their underlying stocks. Sometimes, savvy investors can find options offering great deals. For example, here are three stocks with call options currently offering a dividend-yield-equivalent of 14% or more.

Yield 23.8% on Sony
Shares of electronics company Sony (NYSE: SNE  ) are down 25% since the earthquake struck the company's home country of Japan on March 11. Volatile share prices can make for big options premiums, and that's the case with Sony's options today. Investors can buy shares at today's $25.25 price tag, and write July 2011 $26 calls for a $0.50 in option premium per share. If shares don't rise more than 3% in the next month, you simply keep the $0.50 per share (for an annualized yield of 23.8%) and can repeat the trade for a later expiration. If shares do end up above $26 at expiration, you must sell your shares at that price (and you still keep the $0.50 per share). But that's not a bad deal, either, since you'd be selling for a net 5% gain in just more than a month.

Yield 14.2% on Amazon
Investors in Amazon (Nasdaq: AMZN  ) have been richly rewarded over the past decade; the shares are up 1,100% over that time. With so many growth opportunities, the company has yet to declare a dividend -- a good decision for a growing company, but perhaps frustrating to investors who would like to hop on the Amazon stock train, but who also require near-term income from their stocks.

Such investors are in luck, because Amazon's July 2011 $200 calls currently offer a $2.24 premium, or the equivalent of an annualized 14.2% yield at today's stock price. This yield is locked in if the shares remain below $200 (5.3% above the current price) on July 15. If not, covered call investors sell their shares for a 6.5% gain in 35 days.

Yield 20.2% on Las Vegas Sands
In just the past year, shares of casino owner and operator Las Vegas Sands (NYSE: LVS  ) have risen 119%, then fallen 25%. As I mentioned above about Sony, volatility can drive up options prices, since option buyers become willing to pay more for the right (but not the obligation) to make various trades when the future seems more uncertain. An options seller -- which is what you are when you write covered calls -- can sometimes reap the benefits of those higher premiums.

September 2011 $43 calls on Las Vegas Sands' stock currently offer a $2.00 premium, the equivalent of a 19.7% annualized yield. To reap that yield, shares simply need to do anything but rise more than 8.4% between now and September. And if shares do go on a tear between now and September (after all, this has been a volatile stock), covered call investors can placate themselves for missing out on the even-bigger upswing with the 13.4% return they will have realized in just three months.

How do you find these deals?
That's a good question, because there are thousands of stocks, and each stock can have dozens of options trading for each of a variety of different expiration dates. That's a ton of choices, and most would-be options investors must go through them manually, because options don't lend themselves to accessible screening tools.

One tool that is becoming accessible -- for a short time -- is Motley Fool Options, which is reopening for new members this week. The team at Motley Fool Options spends all day scavenging for the best options ideas, including covered calls, and then brings them to your fingertips. To find out more, and to receive a free copy of their Options Edge Playbook, simply enter your email address in the box below.

Alex Pape does not own shares or hold options positions on any of the stocks mentioned. Motley Fool newsletter services have recommended buying shares of Amazon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 15, 2011, at 9:28 AM, bobbo2323 wrote:

    You cannot look at option yields on an annual basis because the volatility changes so often. Also, covered calls do not protect you very much on the downside if the stock goes down. Therefore, I would recommend writing covered calls on stocks that you actually like versus looking for the highest yield. The higher the option volatility, the more chance you could lose your skirt if the stock begins a heavy move to the downside.

  • Report this Comment On June 15, 2011, at 3:33 PM, pondee619 wrote:

    "you simply keep the $0.50 per share (for an annualized yield of 23.8%)" May I see your trading history for a year+ showing this "annualized yield" actually being achieved? thank you.

  • Report this Comment On June 17, 2011, at 8:29 AM, pondee619 wrote:

    May I PLEASE see your trading history for a year+ showing this "annualized yield" actually being achieved? thank you.

    It does exist, right? Or is it that you are just talking nonsence?

  • Report this Comment On June 22, 2011, at 2:58 PM, pondee619 wrote:

    Didn't think such a history existed. Just more nonsense from the fool.

  • Report this Comment On June 22, 2011, at 6:50 PM, XMFPapester wrote:

    Pondee - Apologies for not getting back to you sooner; I just saw your comment this afternoon.

    There is a difference between an annualized yield and an annual yield. Annual yield is what is actually happened; annualized is what were to happen if we were to repeat this transaction over and over until we hit one year.

    Of course, you are in no way locking in an annualized yield figure with the initial transaction. It is theoretical. It is useful, though, because it allows us to make comparisons among possible trades.

    That said, if have set aside a certain chunk of money for such trades, you very certainly could make such returns. For covered calls like the ones in the article, rolling the trades can result in just such results (with appropriate changes to expirations and strike prices), or it might be optimal to modify the trade to different strategy or to a different stock. We have done all of the above in both Motley Fool Options and Motley Fool Pro.

    If you'd like to see our full history, you can try Options or Pro for 30 days for free and go through every single transaction we have ever made.

    But bottom line, just because you are not locking in a given yield for a full year doesn't mean it is impossible to earn such a yield, and it certainly doesn't mean annualized yield figures aren't useful metrics.

    Cheers,

    Alex

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