Financial Covered Call Strategy (XLF)

If you are considering speculating on the market/financial and think now is a good time to buy (I am not totally in agreement, but let's put that aside for a moment), here is a high yielding covered call strategy.

Buy XLF (iShares financial ETF) for $12.50 and sell a June 2008 Call for 1.56, a 12% call premium which is unheard of for an option that is 20% out-of-the-money (OTM)!



If in June, XLF is trading for $15 or less, the covered-call strategy will be 12% better off than being long-only. In fact, the covered call strategy for XLF performs better than being long-only at any price under about $16.50 (which would be a 30% increase in 7 months). The covered call strategy has a max retun of 32% so if XLF goes to $20, you will have been better off having just bought the stock. On the other hand, the covered call strategy gives a 12% cushion to the downside, and generates very nice returns (20% annualized) even if XLF is still trading at$12.50 in June. For all this extra premium, do you really mind capping your returns on this trade at over (50% on an annualized basis)??