A covered call is an options strategy that revolves around buying a stock and selling a call option.
The call option gives the buyer the right to purchase the underlying stock at a specified price (the strike price) on or before a predetermined date (the expiration date).
The seller of the call option then collects a premium from the buyer in exchange for taking on the risk of the stock increasing in price.
With that said, below is a look at some of the best stocks for covered calls.
Best Stocks For Covered Calls
Oracle Corporation (NYSE: ORCL)
Oracle Corporations is a proven great option for covered call strategies, and as such, they are first up on our list.
Oracle is a multinational technology company that sells various software and hardware, including database management systems, cloud services, and enterprise software.
The system software company is best known for its software products and services, including Java.
Oracle Corporation has a strong track record of generating consistent profits, as evidenced by its market capitalization of $229.29 billion.
One primary benefit of using a covered call strategy with this underlying stock is its low volatility. Its stock prices tend to be stable over time, even amidst market trends and news fluctuations.
Furthermore, Oracle’s options tend to have higher premiums even with its stability, providing covered call sellers with more income potential.
ORCL shares sold for roughly $89 per share as of early March 2023.
Ford Motor Company (NYSE: F)
We cannot talk best stocks for covered call strategies without mentioning international automobile manufacturers, Ford Motor Company.
Ford is known for producing some of the most popular and iconic vehicles in automotive history.
The Model T, the Mustang, and the F-Series pickup truck are some of its most renowned products. It also owns the Lincoln luxury brand.
Ford has been at the forefront of innovation in the automotive industry, with a strong focus on electric and autonomous vehicles.
Its Mustang Mach-E electric SUV and F-150 Lightning electric pickup truck have received widespread attention and critical acclaim.
The company has also invested heavily in self-driving technology through its subsidiary, Argo AI.
In the wake of its Covid-19 pandemic losses, Ford implemented restructuring plans to improve its profitability and long-term growth prospects.
The plan proved to be a stroke of genius.
The company began running its combustion engine business, Ford Blue, and its BEV business, Ford Model E, as separate businesses but still all under the Ford Motor Company.
Historically known for its low volatility and recovery potential, the company reported a revenue of $158.06 billion in 2022. The highest since 2018.
Ford reported a strong sales growth of 21% in February 2023, with its shares trading at a price of about $13 at that time.
Verizon Communications (NYSE: VZ)
Verizon Communications is a well-established telecommunications company that provides data services and essential services to its customers, which may make it a relatively stable investment.
The company’s infrastructure consists of various segments, including Verizon Consumer Group and Verizon Business Group, both of which focus on consumer networking solutions and corporate networking solutions.
The company is highly profitable, reporting a revenue of $136.84 billion in 2022.
This year, experts predict that the figure will increase by at least 1% from its services, and they also expect total wireless revenue growth to be between 9% to 10%.
However, what stands out for covered call sellers is Verizon’s dividend records.
The company has a dividend yield of 7.14% and an annual payout of $2.41. These dividends are paid quarterly, providing a steady income stream for investors.
Verizon has also recorded 18 years of dividend growth, beating its closest competitors.
VZ has a market cap of $153.46 billion, with its shares selling for roughly $39 at the end of February 2023.
PepsiCo, Inc. (NASDAQ: PEP)
PepsiCo, Inc. is a multinational food and beverage company that produces, markets, and distributes a wide range of products, including soft drinks, snacks, juices, and sports drinks.
PepsiCo’s brands include Mountain Dew, Gatorade, Tropicana, Doritos, and many others.
Its products are sold in over 200 countries and territories worldwide. In addition to its food and beverage business, PepsiCo also operates a global snack and beverage distribution network.
Overall, its diversified product portfolio, global reach, and commitment to innovation make it a strong, stable, and reliable choice.
Aside from being a company with a track record of success, PepsiCo is a blue-chip stock and should be high on the list for covered call sellers.
This is because the company is currently focused on expanding its product portfolio and reaching new markets amidst current food inflation.
Also, beverage stocks like Pepsi and Coca-Cola report good financial performance as investors turn to their stability for safety.
PepsiCo has a strong financial position, with steady revenue growth and a solid balance sheet.
The company announced year-over-year revenue growth of 8.70%.
It reported a revenue of $86.49 billion in 2022, and experts tip them for an almost 4% revenue growth this year.
Its dividend yield is also attractive to covered call sellers looking for a consistent income while they hold their position long-term.
The yield currently stands at 2.65%, with an annual payout of $4.60.
PEP shares sold for an estimated $173 as of early March 2023.
Pfizer Inc. (NYSE: PFE)
Pfizer is a well-established and financially sound company with a long history of stable performance, making it a blue-chip stock.
Its stock prices have been notably less volatile than other healthcare stocks.
Its options premiums have also generally been in line with or above those of other large-cap pharmaceutical stocks.
It started 2023 strong, with its shares selling for a rough estimate of $45 in January.
The company is set for a further boost after the FDA press release attesting to the effectiveness of the company’s covid vaccines against the omicron strain.
This came amidst accusations that Pfizer’s vaccine is partly responsible for the rebound of the disease in some parts of the world.
It has a dividend yield of 4.11% and an annual payout of $1.64, reporting its 12th year of consistent dividend growth.
Advanced Micro Devices, Inc. (NASDAQ: AMD)
Advanced Micro Devices, Inc. is a semiconductor company that designs and manufactures microprocessors, graphics processors, and other computer hardware components.
The California-based company is known for its high-performance CPUs and GPUs used in personal computers, gaming consoles, and data centers.
Its most notable product is its Ryzen processors, which have gained popularity for their competitive performance and affordability compared to competitors like Intel.
AMD stocks have recorded strong performance despite heavy competition.
Experts attribute this to its successful product launches, increased market share, and strong financial performance.
In addition to processors, the company produces chipsets, server processors, and embedded processors. It also partners with major technology companies such as Microsoft, Sony, and Dell.
The growth potential of the company, coupled with its products being in high demand, make it a perfect fit for covered call strategies.
Advanced Micro Devices has a market capitalization of $132.15 billion. The company’s share is currently trading at about $85.
NVIDIA Corporation (NASDAQ: NVDA)
Perhaps AMD’s biggest competitor is NVIDIA Corporation.
Like AMD, NVIDIA Corporation is a technology company specializing in developing graphics processing units (GPUs) and other computer hardware and software products.
The company is known for its high-performance graphics cards used by gamers and professionals in video editing, animation, and machine learning.
Its GeForce and Quadro lines of graphics cards are among the most popular on the market.
Nvidia’s dominance in key markets such as gaming and artificial intelligence may provide a competitive advantage and potentially lead to increased earnings and stock prices.
The corporation has a standing partnership with BigTech companies like Google and Microsoft.
The latter recently released a new virtual machine line that features NVIDIA H100 GPUs.
For that reason, experts back the company in continuing its recent market rally despite the SVB collapse.
NVIDIA has a vast growth potential, reporting a market cap of $566.34 billion. The company’s shares are trading at about $235 as of early March 2023.
Walmart Inc. (NYSE: WMT)
Walmart Inc. is one of the largest retailers in the world, operating a chain of discount department stores, supermarkets, and warehouse clubs.
Its business model is based on offering low prices to customers through its efficient supply chain and economies of scale.
This model has succeeded partly due to the company having a wide range of products and its operation of physical stores, plus a large e-commerce platform.
Walmart has a significant market share in the retail industry. Its sheer scale and product reach make it a relatively stable and reliable covered call investment option.
Its stability could, however, lead to lower options premiums, as it reduces the risk of significant price swings that could result in losses.
So if you’re looking for a safer bet for your covered call strategy, this could be the stock for you.
Walmart stock prices took a slight hit in recent weeks due to weak forecasts making this an excellent time to buy as a rebound is expected if its history is anything to go by.
In January 2023, the company reported a revenue of $611.29 billion, with an almost 4% increase forecasted for next year.
Walmart has a market cap of $372.43 billion, and its shares sold at roughly $142 as of the end of February 2023.
Morgan Stanley (NYSE: MS)
Last on our list is investment banking giant Morgan Stanley.
The New York-based firm is a global financial service company with clients ranging from corporations, governments, and individuals.
Suppose you are looking for higher option premiums. Morgan Stanley stocks are an excellent option due to its high volatility when compared to other financial stocks.
The risk has historically proven to be worth the reward with Morgan Stanley.
The company has a global presence, having offices in more than 40 countries. It is also reputed for conducting high-profile transactions and deals.
In light of the SVB collapse, many analysts still tip Morgan Stanley for long-term solid financial performance.
The company has a market cap of $151.32 billion, with its stock price at $96 as of February 2023.
Last year, it reported a revenue of $53.39 billion, with experts estimating that figure will rise to $56.52 billion this year.
Morgan Stanley pays a dividend, which can provide a steady source of income for covered call sellers.
However, due to its high volatility, its dividend yield is always relatively low compared to many other financial stocks.
Currently, its dividend yield is 3.45%, with an annual payout of $3.10.
Are Stocks For Covered Calls a Good Investment?
It makes sense to consider stocks for covered calls as suitable investments because they provide a steady income stream while allowing investors to benefit from any potential appreciation of the underlying stock.
The covered calls strategy allows for some protection against a decline in a stock’s price, as investors can collect the option premium even if the stock decreases in price.
Additionally, covered calls can be a helpful way to manage risk in a portfolio, as investors can limit their downside potential while still having the opportunity to benefit from any potential upside.
How Profitable Are Covered Calls?
The maximum profit you can receive from utilizing covered calls is limited to the strike price of the short call option minus the purchase price of the underlying stock plus the premium received.
What Is The Best Strike Price For Covered Calls?
Ultimately, the best strike price when writing covered calls is the one that meets your profit goals.
How Far Should You Sell Covered Calls?
It is generally advisable to sell covered calls in 30-45 days. However, the most crucial aspect to consider when it comes to selling is to pick a date that provides a fitting premium at your desired strike price.