A CALENDAR SPREAD that involves selling the January ’12 37 call and buying the January ’13 33 call should cost $32.59 less per share than the covered call and potentially yield a 100% return if the stock stays above $37 through expiration
TRADE: Noble (NYSE: NE) ended the last trading session at $37.79. So far the stock has hit a 52-week low of $27.33 and 52-week high of $46.72. NE has had an S&P 4 STARS (out of 5) ranking since 6/8/2010. On 7/21/2011 S&P equity analysts set a 12-Month price target of $47.00 for the stock. Noble stock has been showing support around $36.76 and resistance in the $38.52 range. NE is part of the S&P 4 STARS stock list. One way to play this stock would be with a calendar spread that substitutes a longer term call option in place of the covered call stock purchase. To use this strategy consider going long the NE Jan ’13 33 Call and selling the Jan ’12 37 call for a $2.00 debit. The strategy has a 75 day life and would provide 7.38% downside protection and a 100.00% assigned return rate for a 486.67% annualized return rate (for comparison purposes only).
RISK: The Calendar spread strategy will normally carry more risk than a covered call strategy, but the rate of return is generally higher, since there is a lower capital outlay. At a 3 Key risk ranking this strategy is considered to have moderate relative risk. If the stock price at expiration is below $37 this strategy will not generate the potential returns shown. Another risk for this strategy is related to the bought Call Option price. If the stock drops in price between now and
expiration date, there is a possibility that the Jan ’13 33.00 call could drop quickly.