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Healthcare Stocks
Healthcare stocks have a place in every investor's portfolio. Representing 10% of the S&P 500 (by market cap), many healthcare stocks are blue chip companies that have the kind of healthy, stable, and sizable dividends income investors seek. Of course, we can use call options to generate even more annual yield, and Fortune magazine agrees with us:
"By selling call options on stocks you already own, you can boost your returns with little risk. Let's say you bought the stock of drug maker Abbott Laboratories..." Fortune magazine, Oct 17, 2011
What kinds of healthcare companies are we talking about? Stocks that pay at least 3% annual dividend. For example:
| Company | Dividend Yield |
|---|---|
| ABT | 3.5% |
| AZN | 5.9% |
| BMY | 3.9% |
| GSK | 4.9% |
| JNJ | 3.5% |
| LLY | 5.0% |
| MRK | 4.7% |
| NVS | 4.3% |
| PFE | 3.9% |
| SNY | 5.0% |
This is by no means an exhaustive list. Other healthcare stocks that pay a dividend but not at the 3% or better level include: BCR, BDX, MDT, NVO, TEVA.
Example Stocks For Healthcare Covered Calls
If we take the 3% or better group and plug them into our covered call screener, we find these OTM (out of the money) opportunities for the December expiration:
| Symbol | Stock Price |
Sell Call | Net Debit | Annualized Return If Flat |
|---|---|---|---|---|
| SNY | 35.55 | Dec 36 @ 0.40 | 35.15 | 40.2% |
| ABT | 54.84 | Dec 55 @ 0.43 | 54.41 | 29.2% |
| LLY | 39.59 | Dec 40 @ 0.31 | 39.28 | 29.2% |
| JNJ | 64.67 | Dec 65 @ 0.45 | 64.22 | 25.5% |
And these OTM trades for the January expiration:
| Symbol | Stock Price |
Sell Call | Net Debit | Annualized Return If Flat |
|---|---|---|---|---|
| SNY | 35.55 | Jan 36 @ 1.20 | 34.35 | 28.4% |
| MRK | 35.83 | Jan 36 @ 0.63 | 35.20 | 24.3% |
| BMY | 33.66 | Jan 34 @ 0.55 | 33.11 | 21.9% |
If ITM (in the money) options are more to your liking, then these:
| Symbol | Stock Price |
Sell Call | Net Debit | Annualized Return If Flat |
|---|---|---|---|---|
| AZN | 45.69 | Dec 45 @ 1.10 | 44.59 | 32.8% |
| SNY | 35.55 | Dec 34 @ 1.75 | 33.80 | 21.9% |
| GSK | 45.35 | Dec 45 @ 0.65 | 44.70 | 25.5% |
| SNY | 35.55 | Jan 34 @ 2.40 | 33.15 | 21.1% |
| AZN | 45.69 | Jan 45 @ 1.85 | 43.84 | 21.1% |
Healthcare stocks like these should make up at least part of any well diversified covered call portfolio. Most have a long history of paying and increasing dividends. Combined with call writing, they are solid producers for income-oriented portfolios.
Mike Scanlin is the founder of Born To Sell and has been writing covered calls for a long time.