Summary
- Covered-call writing is one of my favorite strategies to generate monthly income while mitigating downside risk.
- J&J is a perfect stock to write calls against.
- After analyzing the theoretical options pricing, I'm looking to sell the in-the-money calls.
Covered-call writing is one of my favorite strategies to generate monthly income while mitigating downside risk. However, sticking to the basics is of key importance to make it work. In fact, many covered-call writers may not ask themselves the right questions. For instance, there's often a focus on maximizing profits without considering downside risk protection and volatility.
In this article, I'll take a closer look at J&J (JNJ) which remains extremely sound (FCF margin of more than 22%, attractive return on assets, and a well-managed balance sheet). To successfully execute against the covered-call strategy, I've created a blog post consisting of the concepts which I believe matter the most. You can read it here.
Fundamental Review Of J&J
To me, FCF is the most relevant metric as it determines whether the dividend payments are sustainable. When putting it together with leverage, operational efficiency, and debt service ratios, we get a better understanding of how management is running the company.
