Exxon Mobil (XOM) is currently one of the top yielding S&P 500 stocks. So far this year, the integrated oil and gas titan is sharply outperforming the S&P 500 with a year-to-date gain of 49%. Exxon stock is also above rising 21-day and 200-day moving averages, but slightly below the 50 day.
Investors searching for yield can further enhance the yield on stocks such as XOM by using a covered call strategy.
When selling a covered call, the investor receives a premium and has an obligation to sell the shares at the strike price if called upon to do so.
Exxon Stock Today: Why A Covered Call Makes Sense
One call option contract represents 100 shares, so investors can sell multiple call options if they have a particularly large stock holding.
Over time, covered calls have the potential to increase returns while also decreasing the volatility of a portfolio.
On Exxon stock, a Sept. 16-expiring monthly call option with a 92.50 strike price recently sold near $2.70. Selling this call option would generate $270 in premium per contract and increase the annualized yield by 30%.
XOM currently pays around $3.52 in annual dividends per share. So generating another $2.70 from covered call writing in less than six weeks is quite attractive.
The $2.70 in premium received also gives a small buffer on the downside of almost 3%. That means Exxon stock could trade 3% lower between now and Sept. 16 and the covered call trade would still break even. The total capital at risk in the trade would be $8,789; if XOM went to zero, that’s how much the trade would lose.
Please view covered calls as a fantastic way to generate extra income from a stock holding while also providing some downside protection.
Investors would need to weigh the pros and cons of even a blue chip such as Exxon stock before initiating a bullish trade like a covered call.
Remember that options are risky and investors can lose 100% of their investment.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
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