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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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How To Use a Protective Put with a Covered Call

One of the basic mistakes that new covered call traders make is that they trade for the highest premium available to maximize their monthly income without looking at the amount of risk they are taking on with this type of trade.  When option premiums are high there is a reason for the increase in option pricing because of some uncertainty or increased risks.  The advanced covered call trader knows this and uses a protective put to manage their risk of loss on a high volatility trade.

The classic strategy is protect a position is to buy a put which is referred to as a “protective put.”  With a put buy you have the right (but no obligation) to sell a stock at the strike price of the put.  The protective put allows the stock owner to keep the stock but limits the amount of downsize to a lower stock price at the put’s strike price.  The stock owner no longer has price risk once the stock price falls below the put strike price as they can sell the stock at the put strike price before the option expires.
Stock investors refer to a put as price insurance as the cost of buying a put is similar to paying an insurance premium and the ownership of the put is
the insurance policy.  The management of stock price insurance is an additional cost to the trade.  For covered call investors, they must determine if it is worthwhile to buy the put as it will affect their monthly income plan.  The amount of buying a put depends on the amount of time before expiration, the strike price and the implied volatility of the put.  As you know, as volatility increases then option prices will tend to increase as well.

The table below shows an example trade with Under Armour (UA).  The stock is trading at $67.74 per share.  This example displays buying a put for protection at three strike prices: ITM, ATM & OTM.  As shown, the more in-the-money (ITM) the put then the more protection in stock price and less risk exposure in dollar terms.  The risk exposure is calculated by subtracting the put strike price from the net debit (share price + put cost).

The bottom two rows in the table show selling an ATM October call of 67.5 on UA.  You will receive $5.80 in premium for every call sold.  If you subtract this call premium from the risk exposure shown in the top portion of the table, you get the total risk exposure of the covered call with protective put trade.

Again – the more ITM the trade, the less risk exposure.  This example assumes the protective put strike price comes into play.  Of course, you would not usually use this strategy in a bull market as it is more effective during bear markets with increased levels of uncertainty.  You can also play what-if by using different
expiration months for the protective put.

How to use a protective put with a covered call

Click to enlarge

 

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