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Shelter from the Storm


Selling covered calls—a bet on the stability of quality stocks—can juice returns in a nervous market

As gyrating markets put even top-quality shares under pressure, selling options on stocks you own might be a handy way to juice your returns. "This is a very good strategy if you're holding a stock you believe in," says Victor H. Schiller, who heads the Investors- Observer.com investment service.

The seesawing market is ripe for so-called covered calls. If you own a high-quality stock that isn't likely to rocket upward (or plunge), you sell a call option. This gives the buyer the right to buy your shares for a specified price. If the stock fails to hit a target price in a preset time period, you keep both the stock and the cash (the "premium") for which you sold the option. If the price hits or tops the target, you must sell the stock but you keep the premium.

Look at General Electric (GE). If it trades at about $37 a share and you sell a call option on it that expires in March for a 67 cents-a-share premium, you may wind up keeping the stock and the premium. If you buy it at $37, your gain could amount to an expected return of 1.82%, or 6.69% annualized. If your cost is lower, your gain will be greater. Of course, if the stock hits the $40 strike price, you must sell—but then you still pocket the price gain up to $40 and the premium. "Anticipate that you will be selling the stock," warns Michael Schwartz, chief options strategist for Oppenheimer (OPY).

You can trade with a broker or online services. At Chicago-based optionsxpress.com, commissions are $1.50 per contract with a $14.95 minimum per trade—$29.90 for covered calls. Many brokers offer recommendations, as do sites such as InvestorsObserver.com, which produced this list.

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