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Covered Call Trade of the Month

Investors seeking income in this volatile market can still sell covered call trades for both income and downside protection.  In the past month, the S&P 500 produced a return of 0.73%.  However, subscribers to the Get Rich Monthly Income Plan made off with a 4.7% return by trading a covered call on United Rentals (URI).  Here is the trade posted in July:

Covered Call on United Rentals (URI)

STRATEGY: Look at the August 55 covered call. For each 100 shares of United Rentals (URI) stock you buy, sell one August 55 covered call option for a $52.53 (55.63 – 3.10) debit or better.

Actions: URI is currently trading at $55.01 so the 55 call we sold is ATM.  These shares and call options should be closed on Friday (08/16) for a 4.70% assigned return.

 

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http://getrichinvestments.com/monthly-income-newsletter/

A New IPO – Gold Stocks with a 7% Dividend Yield

If you are looking for income and have an interest in gold as an investment, then a new IPO might be what you are looking for to combine the two needs.  Faircourt Gold Income Corp. (FRCGF) is a new closed-end fund that invests in gold stocks and sells covered calls and puts for income.  With the current market flux, gold is a good play until we get more definite information where the fiscal policy and taxes end under the new negotiations.  Why not let professional managers sell covered calls and pay you monthly dividends.  Here are the details.

Faircourt Gold Income Corp., a closed-end investment fund established as a mutual fund corporation under the laws of the Province of Ontario, is offering upon the terms and subject to the conditions specified in this short form prospectus, to issue up to 4,733,740 Class A shares of the Company at a price per Offered Share of $8.45.  The initial IPO was November 9, 2012.

The shares are currently trading at $8.24, a 2.5% discount to the IPO price.  Faircourt Gold Income pays monthly distributions with an annual yield of 7.0%.

 

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The Company will not make any investment that would result in holdings of gold companies comprising less than 60% of the NAV of the Portfolio of the Company at the time of such investment. The Company will not make any investments that would result in holdings of gold bullion comprising greater than 30% of the NAV of the Portfolio of the Company at the time of such investment.

In order to generate additional returns and to reduce risk, the Company has engaged the Manager to employ an option strategy whereby it writes covered call options on securities held in the Portfolio and cash secured put options on securities desired to be held in the Portfolio. It is the Manager’s belief that utilizing the option strategy will assist in providing Shareholders with lower volatility and potentially enhanced returns as compared to owning the individual securities in the Portfolio directly.

The Manager believes that option writing has potential to add value in some sectors more than others. Option writing programs in the past have relied on the volatility of a security as a source of long term capital gains distributions. All other things being equal, sustained volatility in the price of a security results in higher option premiums in respect of such security. The Manager believes gold stocks, which have historically maintained a high degree of volatility, are well suited for a covered call writing strategy. This higher degree of volatility is reflected in the S&P/TSX Global Gold Index which has an historic 10 year average volatility is 36% as measured by standard deviation, between September 2002 and September 2012, while the S&P/TSX Composite Index has exhibited a volatility of 16% during the same period.

Covered call options and cash secured put options may be written from time to time in respect of part of the Portfolio.  The extent to which any of the individual securities in the Portfolio are subject to options and the terms of such options will vary from time to time based on the Manager’s assessment of the market.

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.

Covered Call Options Strategy for United Parcel Services (UPS)

Today’s covered call trade is on United Parcel Services (UPS) that reported better than expected earnings on 10/24/2011.

United Parcel Service Inc. (UPS) reported a 5.1% increase in third-quarter earnings Tuesday that topped Wall Street’s profit forecast, although overall package volume was stagnant due to a downturn in Asian exports and slack U.S. demand.  Executives of the Atlanta-based shipping giant voiced cautious optimism for the fourth quarter nonetheless, saying that the U.S. economy appears to have stabilized and noting that Asian imports could increase in the weeks leading up to the holidays if U.S. consumer confidence improves.

OPTION STRATEGY:

Look at the December 2011 70 covered call. For each 100 shares of United Parcel Service (UPS) stock you buy, sell one December 2011 70  covered call option for a 67.72 (69.57 – 1.85) debit or better.  That’s potentially a 3.37% assigned return in 52 days for an anualized return of 23.7%.  This stock also pays a dividend which may add another 0.8% to the return. The stocks next ex-dividend date is 11/08/2011.

TECHNICALS:

The technicals for UPS are bullish with a weak upward trend.  The stock is under accumulation with support at 67.61.  S&P rates this stock 4 STARS (out of five) – buy.

STOCK RISK PROTECTION:  For those wishing to add more downside protection, buy the April 2012 67.5 put for 4.40.  Sell the put when you exit the covered call trade.

S&P RESEARCH NOTES:

S&P reiterates buy opinion on shares of United Parcel Service (UPS) . Q3 EPS of $1.06, vs. $0.93, misses our $1.10 estimate, but is $0.01 above the Capital IQ consensus forecast.  UPS saw slowing international volumes and flat U.S. volumes, but offset this with higher yields and fixed cost leverage.  UPS reaffirms prior ’11 EPS guidance of $4.15-$4.40.  We trim our ’11 and ’12 EPS estimates to $4.30 and $4.90, from $4.35 and $5.00.  We keep our 12-month target price at $95, 19X our ’12 EPS estimate, and in the middle of UPS’ 5-year historical P/E range.  We still think UPS is well positioned for an eventual rebound in the global economy.

UPS Option strategy

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Covered Call Trade on AT&T (Video)

Brian Stutland lays out a covered call trade for income on AT&T (T)

Covered Call Trade on AT&T

 

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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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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.

Covered Call on Invesco (IVZ)

Invesco Ltd (IVZ) is an independent global investment management company. Invesco provides a range of investment strategies and vehicles to its retail, institutional and high-net-worth clients globally. It has operations in the institutional and retail segments of the investment management industry in North America, Europe and Asia-Pacific, serving clients in 150 countries. As of December 31, 2010, its distribution network has gathered assets of 61% retail, 36% institutional, and 3% Private Wealth Management clients. 32.6% of client assets under management are outside the United States, and it serves clients in more than 150 countries. On June 1, 2010, Invesco acquired Morgan Stanley’s retail asset management business, including Van Kampen Investments.

STRATEGY:
 
Look at the January 22.50 covered call. For each 100 shares of Invesco (IVZ) ) stock you buy, sell one January 22.50 covered call option for a 21.08 (23.28 – 2.20) debit or better. That’s potentially a 6.7% assigned return. This stock also pays a dividend which may add another 1.2% to the return. The stocks last ex-dividend date was 5/18/2011.

IK -> COMMENT:

 The technicals for IVZ are bearish with a weak downward trend. The stock is under accumulation with support at 21.29. S&P rates this stock 4 STARS (out of five) – buy.

S&P research notes:

 S&P maintains buy opinion on shares of Invesco Ltd. (IVZ) . Q2 adjusted EPS of $0.44, vs. $0.27, misses our $0.45 estimate. Despite our view of a difficult environment for asset gathering, IVZ achieved 4.2% sequential top-line growth through strong management and performance fees. Going forward we expect IVZ’s results to benefit from strong fund performance, a stable net revenue yield on assets under management and inflows into fixed income and money market funds. We cut our ’11 EPS estimate $0.05 to $1.72 and initiate ’12’s at $1.97. We trim our target price by $3 to $26, 14.1X our forward earnings forecast and in line with peers.
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