I start out by calculating how much option premium I need in order to provide a 12% annual yield on the original stock investment. For non-dividend paying stocks the calculation is simple, just multiply the per share cost basis of the stock by 1% to get the monthly premium required. For dividend paying stocks, I must first calculate the dividend yield based on my cost basis, not on the current stock price. Then determine how much option premium I need to add in order to yield 12% annually, and finally divide the total by 12 to get the monthly premium required.

Here are the formulas I use:

Yield on Cost = Annual Dividend / Cost Basis per Share

Required Option Yield = 12% - Yield on Cost

Required Option Premium = Cost Basis per Share * Required Option Yield

Required Monthly Premium = Required Option Premium / 12

The following are a few examples using some of the positions I adjusted yesterday.

**Example 1 - ADP**

Cost Basis per Share: $43.08

Annual Dividend: $1.32

Yield on Cost: 3.06%

Required Option Yield = 8.94%

Required Option Premium = $3.85

Total Annual Income = $5.17

Total Annual Yield = 12%

Required Monthly Premium = $0.32

So, in order to get a 12% annual yield from dividends and option premiums I only needed to sell an ADP option for $0.32 per month. Now, I wanted to go two strikes OTM on this position to get back to the original strike price. The Jan09 42.50 call had a bid of less than $0.32 so it didn't meet my criteria. So I needed to go out an extra month, which meant I needed to get at least $0.64 for 2 months, $0.92 for 3 months, etc. So, I sold a Feb 42.50 call for $0.91, which was almost 3 months worth of option premium for a 2 month call.

**Example 2 - BAC**

Cost Basis per Share: $33.72

Annual Dividend: $1.28

Yield on Cost: 3.80%

Required Option Yield = 8.20%

Required Option Premium = $2.77

Total Annual Income = $4.05

Total Annual Yield = 12%

Required Monthly Premium = $0.23

In this example I only needed $0.23 and was able to get twice that amount by selling the Jan09 16.00 call, two strikes OTM, for $0.47.

**Example 3 - BBT**

Cost Basis per Share: $33.36

Annual Dividend: $1.88

Yield on Cost: 5.64%

Required Option Yield = 6.36%

Required Option Premium = $2.12

Total Annual Income = $4.00

Total Annual Yield = 12%

Required Monthly Premium = $0.18

In this example I only needed $0.18 and was able to get $0.19 by selling the Jan09 32.50 call, three strikes OTM.

**Example 4 - WFMI**

Cost Basis per Share: $42.82

Annual Dividend: $0.00 (dividend suspended)

Yield on Cost: 0.00%

Required Option Yield = 12%

Required Option Premium = $5.14

Total Annual Income = $5.14

Total Annual Yield = 12%

Required Monthly Premium = $0.43

This is an example of a non-dividend paying stock. In this case, the dividend was suspended. I needed $0.43 for a Jan09 11.00 call, two strikes OTM, but wasn't able to get it. Nor could I get $0.86 for a Feb09 11.00 call, although I could have gotten $0.84 on a Feb09 10.00 call but that was too close to the money. So I had to settle for the Feb09 11.00 call at $.43, about half of what I needed.

This method helps me determine how much option premium I need to meet my goal of 12% annual yield on the overall portfolio. Sometimes I get more on a given position and sometimes I get less, but on average I should be able to meet my goal on the entire portfolio. I hope this article has provided some insight into my thought process.