Options for Beginners: Choosing the Right Shares for Your Covered Calls

For investors interested in using options, it’s important to understand the underlying stock as well as the strategy in question.

In this segment from Motley Fool Live that first aired July 9, Motley Fool Canada analyst Jim Gillies, Motley Fool Options advisor Jim Mueller, CFA, and Fool.com editor/analyst Ellen Bowman discuss which stocks are right for covered calls.

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Ellen Bowman: We’re going to talk about a recommendation that’s ongoing in the option service which is to write covered calls on Starbucks (NASDAQ: SBUX). My first question for either of you is going to be why this company, but then I’m going to answer it myself because that is where I’m going after the segment [laughs] because I’ve not had coffee yet this morning. Starbucks, the argument, why covered calls on that particular company?

Jim Mueller: Well, as we were discussing earlier, Jim Gillies asked the question, “Who’s going to replace it?” Starbucks is probably going to end up being one of those 100-year-old companies that stick around and sell coffee for years and years and years. Generating cash for years and years and years and paying shareholders and slowly seeing it’s rising share price, and it could be considered a blue-chip, big, steady company. It’s share price can be a bit volatile. It was down to what? Eight dollars.

Jim Gillies: Starbucks in 2008/2009, in the teeth of the credit crisis, this was going to make you cry. Starbucks cracked four dollars briefly on the way down. I should have mortgaged my home [laughs] and put all of that into Starbucks. Jim Mueller: Well, this is the problem with crystal balls. It’s a 29-baggers since then. It’s trading at $117 a share. I don’t think it’s split since then either. Jim Gillies: I don’t think they’ve split. That’s a good point. I’m going to double-check here. Jim Mueller: If they have, it’s been an even bigger success, right? Jim Gillies: Exactly. Go on, Ellen. Ellen Bowman: It just bolsters the case even more if they have. But I don’t think they have. I only go in and I don’t know more, and that’s a shame. Jim Mueller: It’s an example of a company that is a steady company, has a steady stream of revenue from recurring customers. Everyone who starts going to Starbucks ends up going back to Starbucks. It’s been the third place before the pandemic. It’s probably going to become the third or fourth or fifth place after the pandemic. Ellen Bowman: Second place if none of us go back to the office.

Jim Mueller: Exactly. [laughs] It’s a nice steady company. That’s the stock price doesn’t tend to move a lot in a short period of time, which makes writing covered calls against it, and the covered calls paid decently enough that it’s worthwhile doing.

Jim Gillies: Just a clarification, Ellen. A, it has split two for one due to credit crisis. But B, the four dollar prices is actually split-adjusted. [laughs]

Ellen Bowman: Well, we can finally admit that you know what you’re talking about. That’s good.

Jim Gillies: I was going to say, there’s my pedantic moment for the morning.

Ellen Bowman: The one pedantic moment, Jim Gillies? Yeah.

Ellen Simonson Bowman has no position in any of the stocks mentioned. Jim Gillies owns shares of Starbucks. Jim Mueller, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool recommends the following options: short July 2021 $120 calls on Starbucks. The Motley Fool has a disclosure policy.

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