To The Moon

Income investors are usually attracted to high dividend payer like Merck & Company (MRK). The currently dividend yield on MRK stock is sitting around 3.15%.

Using options, we can generate an additional income from high yielding stocks via a covered call strategy.

MRK Covered Call Example

Let’s look at two different covered call examples on MRK stock. The first will use a monthly expiration and the second will use a five-month expiration.

Let’s evaluate the first MRK covered call example. Buying 100 shares of MRK would cost around $8,687. The September 16, 90 strike call option was trading yesterday for around $1.23, generating $123 in premium per contract for covered call sellers. Selling the call option generates an income of 1.44% in 42 days, equalling around 12.48% annualized. That assumes the stock stays exactly where it is. What if the stock rises above the strike price of 90?

If MRK closes above 90 on the expiration date, the shares will be called away at 90, leaving the trader with a total profit of $436 (gain on the shares plus the $123 option premium received). That equates to a 5.09% return, which is 44.24% on an annualized basis.

Instead of the September 90 call, let’s look at selling the January 90 call instead. Selling the January 90 call option for $3.95 generates an income of 4.76% in 168 days, equalling around 10.35% annualized. If MRK closes above 90 on the expiration date, the shares will be called away at 90, leaving the trader with a total profit of $708 (gain on the shares plus the $395 option premium received).

That equates to an 8.54% return, which is 18.55% on an annualized basis.

These figures don’t include any potential dividends received during the course of the trades.

Of course, the risk with the trade is that the MRK might drop, which could wipe out any gains made from selling the call.

Barchart Technical Opinion

The Barchart Technical Opinion rating is a 40% Buy with weakest short term outlook on maintaining the current direction.

Implied volatility is at 22.14% compared to a 12-month low of 15.65% and a 12-month high of 34.71%.

Company Description

Merck & Co. boasts more than six blockbuster drugs in its portfolio with PD-L1 inhibitor, Keytruda, approved for several types of cancer. Keytruda has played an instrumental role in driving Merck's steady revenue growth in the past few years. Well-known products in Merck's portfolio include Keytruda, Simponi , Januvia and Janumet, Bridion, Isentress, ProQuad, Gardasil, Pneumovax 23, RotaTeq and Belsomra. Merck made its biggest acquisition of Schering-Plough and sold off its Consumer Care business to Bayer. Other key acquisitions include Idenix Pharmaceuticals, Cubist Pharmaceuticals, Rigontec, ArQule and Acceleron Pharma. IMerck spun off products from its Women's Health unit, legacy drugs and biosimilar products into a new publicly traded company called Organon & Co.

Of the 18 analysts following MRK stock, 10 have a Strong Buy rating and 5 have a Hold rating.

Covered calls can be a great way to generate some extra income from your core portfolio holdings.

Please remember that options are risky, and investors can lose 100% of their investment. This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.