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Covered Call and Blanket Put on Walgreen (WAG)

Walgreen covered call and protective put

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Covered Call and Blanket Put on Walgreens (WAG).

STRATEGY: Look at the November 34 covered call. For each 100 shares of Walgreen Co. (WAG) stock you buy, sell one November 2011 34 covered call option for a 32.15 (33.30 – 1.35) debit or better. That’s potentially a 5.75% assigned return. This stock also pays a dividend which may add another 0.7% to the return. The stocks next ex-dividend date is projected to be 11/17/2011.

The technicals for WAG are bullish with a weak downward trend. The stock is under accumulation with support at 34.55. S&P rates this stock 4 STARS (out of five) – buy.

RISK: To protect you capital, you should look at buying the Apr 2012 33 Put at 3.50. This will limit your downsize to the put strike price of 33. And you can continue to sell calls each month for premium as long as the trade is still working. The initial trade risk is $2.45 (see chart) but this will decrease for each additional call sold in the months following November expiration.  When you exit the covered call you will sell the Apr 2012 33 Put at market value to recoup some of your protective put cost.

S&P research notes: S&P reiterates buy recommendation on shares of Walgreen Co. (WAG). WAG reports Aug-Q operating EPS of $0.57, vs. $0.49, in line with our estimate and $0.02 above consensus from Capital IQ. We believe the shares may experience near-term pressure due to tense contract negotiations with Express Scripts (ESRX) . However, we think an agreement will be reached before expiration or shortly after expiration of the current contract. Due to greater than expected non-pharmacy margin pressures as consumers trade down, we are reducing our FY 12 (Aug.) EPS projection $0.06 to $3.04, and our 12-month target price by $7 to $40, on comparative analysis.

Covered Call Recommendation on Humana (HUM)

Covered Call Recommendation on Humana (HUM)

STRATEGY:

Look at the October 2011 80 covered call.  For each 100 shares of Humana (HUM) stock you buy, sell one October 2011 80 covered call option for a 75.89 (78.19 – 2.30) debit or better.  This is potentially a 5.42% assigned return. The ex-date is 9/26/2011 for a $0,25 dividend per share which will increase the return.

Blanket Put:  If you are looking for a blanket put for protection, look to buy the Jan 2012 77.50 Put for $7.00.  You will sell the Blanket Put when the covered call position is closed.
Potential Risk: The technicals for HUM are bullish with a possible trend reversal. The stock is under accumulation with support at 76.35. S&P rates this stock 4 STARS (out of five) – buy.

S&P research notes:

S&P reiterates Buy opinion on shares of Humana (HUM) . HUM agrees to acquire MD Care, a California-based Medicare Advantage HMO with 15,000 members. Terms were undisclosed. HUM expects the transaction to close by year end. We see it benefiting modestly from improved economies of scale, as HUM already has 400,000 Medicare members in California. Nonetheless, we think it will improve its competitive position in the state. MD Care had ’10 revenue of $155M, but HUM does not expect the transaction to materially affect ’11 earnings guidance. Our EPS model is unaffected by the transaction until it occurs, and we keep our $90 target price.

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