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Covered Call Write on Advanced Auto Parts

Covered Call trade on Advanced Auto Parts (AAP).

OPTIONS STRATEGY:

Look at the December 2011 70 covered call.  For each 100 shares of Advance Auto Parts (AAP) stock you buy, sell one December 2011 70 covered call option for a 67.06 (69.31 – 2.25) debit or better. That’s potentially a 4.38% assigned return.  This stock also pays a dividend which may add another 0.1% to the return. The stocks last ex-dividend date was 9/21/2011.

TECHNICALs:

The technicals for AAP are bullish with a possible trend reversal.   The stock is under distribution with support at 64.38. S&P rates this stock 5 STARS (out of five) – strong buy.

RISK:

For those wanting downside protection, buy the March 2012 65 put for 3.50.  Sell the put when you exit the covered call.  This is optional for the covered call to protect the downside of AAP at 65.

RESEARCH NOTES:
S&P reiterates strong buy recommendation on shares of Advance Auto Parts (AAP) .   For the 12-weeks ended October 8, EPS of $1.41, vs. $1.03, is $0.22 above our estimate.   While comp-store sales rose just 2.2%, this quarter lapped an exceptional 9.9% increase in the year-ago period, providing a challenging hurdle.   We continue to favor industry fundamentals, and expect global sourcing efforts and supply chain investments to drive improved gross margins over the medium term.  As a result, we are increasing our ’11 and ’12 EPS estimates to $4.96 and $5.71 from $4.72 and $5.47, and are also raising our DCF-based target price by $5 to $85.
EARNINGS HIGHLIGHTS:
  • On 11/09/11, the company announced quarterly earnings of 1.41 per share, a positive surprise of 19.4% above the consensus 1.18.  Over the past 4 quarters, the company has reported 3 positive (>2%), 1 negative(<-2%), and 0 in-line (within 2%) surprises.  The average surprise for this time period has been 5.0%.
  • AAP’s current quarter consensus estimate has remained relatively unchanged over the past 90 days at 0.68.  Estimates within its Subsector have moved an average of 0.0% during the same time period.
  • During the past four weeks, analysts covering AAP have made 1 upward and 0 downward EPS estimate revisions for the current quarter.

Calendar Spread Trade on Noble Corp (NE)

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.

Covered Call Write on JP Morgan Chase (JPM)

Covered Call Recommedation on JP Morgan Chase (JPM) currently trading at $31.30.

STRATEGY:  Look at the March 25 covered call. For each 100 shares of JP Morgan (JPM) stock you buy, sell one March 25 covered call option for a 29.40 (31.30 – 1.90) debit or better. That’s potentially a 5.4% assigned return in 32 days.

Risk:   The technicals for JPM are bearish with a possible trend reversal.  The stock is under accumulation with support at 30.11.  S&P rates this stock 4 STARS (out of five) – buy.  The stock has to drop 6.5% to fall to the breakeven level.
Protective Put:  Those seeking more protection may look at purchasing the March 2012 30 put at $3.15.  Sell the put when you exit the covered call position.
S&P Research Notes:  S&P maintains buy recommendation on shares of JP Morgan Chase and Co (JPM).  Q3 EPS of $1.02, vs. $1.01, misses our estimate of $1.10 on higher than expected loan loss provisions.  As we expected, investment banking and trading fell significantly from Q2. However, credit card revenues, net interest income, and mortgage fees were in line with our expectations.  Quality of earnings improved greatly as reserve releases were relatively small.  We lower our ’11 EPS forecast to $4.67, from $4.87.  We also reduce our target price by $5 to $47, based on a slight premium to peers 10.0X multiple on our forward four quarters EPS projection of $4.76.

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Covered Call Trade Recommendation on Celgene (CELG)

This is a covered call trade for monthly income on Celgene (CELG) using stock and call option with optional protective put.

Covered Call TRADE: Look at the November 2011 65 covered call.  For each 100 shares of Celgene (CELG) stock you buy, sell one November 2011 65 covered call option for a $61.05 (63.35 – 2.30) debit or better.  This is potentially a 6.5% assigned return.

Blanket Put:  If you are looking for a blanket put for protection, look to buy the Apr 2012 60 Put for $5.00.  You will sell the Blanket Put when the covered call position is closed.
Stock Trend: The technicals for CELG are bullish with a weak upward trend.  The stock is under accumulation with support at 61.63. S&P rates this stock 5 STARS (out of five) – strong buy.

S&P research notes:

S&P maintains strong buy opinion on shares of Celgene (CELG) . CELG updates information related to Article 20 European review of Revlimid that resulted in a positive risk/benefit ruling in September. CELG cites secondary malignancy rate of 3.98 per 100 patient years (vs. 1.38 in control group) in prior treated multiple myeloma patients, and 7% rate in newly diagnosed patients (vs 1.8% in control). While higher than we anticipated, we expect drug’s label to reflect these risks, and still see the positive bias on Revlimid’s survival benefits positioning the drug for approval in earlier treatment stages, which we view as a key share catalyst.

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Free Covered Call Trade

Free covered call recommendation on Alkermes is a stock and call setup for income investment.

CALL STRATEGY:

Look at the November 16 covered call. For each 100 shares of Alkermes (ALKS) stock you buy, sell one November 16 covered call option for a 14.78 (16.13 – 1.35) debit or better. That’s potentially a 8.3% assigned return on investment.

 The technicals for ALKS are bearish with a weak downward trend. The stock is under accumulation with support at 15.70. S&P rates this stock 4 STARS (out of five) – buy.
 S&P maintains Buy opinion on shares of Alkermes (ALKS). ALKS completes its acquisition of Elan Drug Technologies for $1.02B, consisting of $500M in cash and issuance of 31.9M of its shares. We continue to see the deal significantly diversifying revenues with royalties from products with long patent lives, thus lowering its risk profile. We also see robust cash flows supporting a rapidly advancing R&D pipeline. On anticipated earnings accretion, we raise our adjusted FY 12 (Mar.) EPS estimate $0.47 to $0.08 and FY 13’s by $0.79 to $1.02. We keep our target price at $22, which reflects the expected benefits from the deal.
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Free Covered Call Trade on Novartis

Covered Call Recommendation on Novartis
Call Strategy: Look at the January 55 covered call. For each 100 shares of Novartis AG (NVS) stock you buy, sell one January 55 covered call option for a 51.62 (55.77 – 4.15) debit or better. That’s potentially a 6.5% assigned return.

 The technicals for NVS are bearish with a weak downward trend. The stock is under accumulation with support at 54.77. S&P rates this stock 4 STARS (out of five) – buy.

S&P research notes:

 S&P reiterates buy opinion on ADSs of Novartis AG (NVS) . NVS recently updated investors on its long-term strategy, indicating that group level margins will be enhanced by its Alcon and Vaccines & Diagnostics (V&D) units, alleviating the impact of patent losses on key brands such as Diovan, Femara and Zometa.
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