Investors can generate portfolio income and benefit from price appreciation in their stock holdings with an options strategy â provided they do it right. An investor who is already holding a certain stock can sell a call option against it â that is, the right to buy an asset at a specified or “strike” price by a certain date â to another investor. This move, known as covered call overwriting, provides portfolio income in the form of call premiums. In addition, if the strike price is sufficiently higher than the current price, the initial investor can benefit from the appreciation in the meantime. The investor does, however, give up any upside above the stock price because at that point the stock will be called away. “The strategy is best suited for names the call seller has a neutral short-term view on, as a call sells the right to upside participation beyond the call strike for a fee,” wrote Arjun Goyal, equity-linked analyst at Bank of America, in a report earlier this month. There are risks to the move. For instance, if the underlying stock falls short of the strike price, the premium can provide some cushion on the downside. However, if your losses exceed the income from the premiums, then you’ll begin participating in the decline. Goyal’s team came up with several call overwriting candidates from the Russell 1000 , assuming an options expiration date of Aug. 16 for each. The firm thinks these names could see upside of at least 6% by that date and command attractive premiums. Bank of America highlighted a call option with a strike price of $220 against Constellation Energy . That’s about 16% higher than where the stock closed on Friday. Back in 2023 , the company signed an hourly carbon-free energy managing agreement with Microsoft to help support one of the tech giant’s data centers in Virginia. Constellation also has a dividend yield of 0.7%. First Solar is another name on Bank of America’s list, with the firm pointing to a call option on the stock with a strike price of $230. That would mark about 6% upside from where the stock closed on Friday. Earlier this year, the producer of solar modules was a beloved data center power play on Wall Street. However, shares of First Solar â and other renewable names â have suffered recently as clean energy investors worry that a Republican sweep in Washington this fall could result in the dismantling of the Inflation Reduction Act. Nevertheless, First Solar shares are up nearly 28% in 2024. Freshpet also made the grade, with Bank of America highlighting a call option with a $140 strike price. That’s about 17% higher than where the pet food maker’s shares ended Friday’s session. Freshpet is expected to report its quarterly results in early August, but it has received some love from Wall Street this summer: TD Cowen highlighted it as a “best smidcap idea” in late June, highlighting the “rising probability of positive revisions to guidance.” Shares of the pet food company have popped more than 37% in 2024.
Source Agencies
