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Covered Call of Month – October Expiration

For subscribers to the Get Rich Monthly Income Plan, the monthly covered call trades all provided positive income from the selling of call option.  One of the better trades was FedEx (FDR) as the setup is shown below.  The covered call trade used a strike price of 120 as the stock closed well above this price on 10/18.  The trade provided a one month gain of 3.9% for covered call traders.

 

Covered Call on FedEx (FDX)

STRATEGY: Look at the Oct 120 covered call. For each 100 shares of FDX stock you buy, sell one Oct 120 covered call option for a $114.53 (116.83 – 1.30) debit or better. That’s potentially a 3.87% assigned return.

TREND:   The technicals for FDX are bullish with a strong upward trend. The stock has support at $107 and is above resistance. The company reported earnings today, Wednesday, September 18. S&P rates this stock 4 STARS (out of five) – buy.

BLANKET PUT: As a protective option to the covered call, you can buy the Jan 2013 110 Put for $3.20 to limit your stock downside to $110.00 per share. This put is not required for the covered call trade but serves as additional protection for those seeking to limit downside. You should sell the put when you exit the covered call position.

 

RESEARCH NOTES:  S&P maintains buy opinion on shares of Federal Express (FDX). We keep our FY 14 and FY 15 EPS estimates at $7.04 and $8.66. We raise our 12-month target price by $10 to $127, 18X our FY 14 estimate and towards the middle of its 10-year historical range of 9X-34X reported EPS. Q1 EPS of $1.53, vs. $1.45, is $0.02 below our estimate but $0.03 better than the Capital IQ consensus. FDX reaffirms FY 14 guidance of EPS growth of 7%-13%. We expect FDX to benefit from an improving global economy and its ongoing restructuring plan, and anticipate continued investor rotation into logistics stocks on good economic news.

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.

 

Learn more here:

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

HFC pays 8th Special Dividend and Boosts Regular Dividend by 50%

Investors looking for a regular helping of special dividends should consider HollyFrontier Corporation (NYSE: HFC). The company just announced its 8th special dividend since August 2011.  In addition, HFC just juiced its regular dividend by 50%.

Subscribers to my Get Rich Monthly Income Plan received $31.00 per share in dividends in 2012 with a yield on cost of 12.5% in one year.  In addition, subscribers received $1,690 in call premiums on each 100 shares of HFC stock in 2012.  The covered call premiums accounts for a yield of 68% as subscribers utilized a special income technique called the perpetual covered call.  In total, Monthly income Plan subscribers booked a total return of 219% on HFC in 2012 alone!

HollyFrontier Corporation (HFC) announced today that its Board of Directors approved a 50% increase in the Company’s regular quarterly cash dividend to $0.30 per share from the current rate of $0.20 per share. This is the fifth increase in the regular dividend since the merger in July of 2011, representing a total increase of 300%. The regular dividend will be paid on April 2, 2013 to holders of record of common stock on March 15, 2013.

The Company also announced today a special cash dividend in the amount of $0.50 per share. The special dividend will be paid on March 19, 2013 to holders of record of common stock on March 5, 2013. This is the 8th special dividend declared by HollyFrontier since August 2011.

HFC’s stock price is up 70% in the past year but still trades at a low PE of 7.5 which is a 60% discount to the industry average PE ratio.  HFC has an equity summary score of 9.8 out of 10 for a VERY Bullish outlook.

Mike Jennings, CEO and President of HollyFrontier, said, “Our Board of Directors remains committed to delivering value to our shareholders through both a growing regular dividend as well as special dividends. After today’s 50% dividend increase, our current regular dividend yield is 2.2%, and our trailing twelve month cash dividend yield stands at 6.1% relative to today’s closing price of $53.72. Including today’s announcement, HollyFrontier has returned almost $1.3 billion in capital to shareholders through regular dividends, special dividends and buybacks since the July 2011 merger.”

Perpetual Covered Call Year End Results

For the year 2012, we had some impressive investment returns.  The Monthly Income Perpetual Covered Call Portfolio easily surpassed both the S&P 500 and PowerShares S&P 500 BuyWrite Portfolio (PBP).  The table below displays the investment returns for each of the Perpetual Covered Call positions.  The average monthly return was 6.2%!  We had exceptional returns on HFC, CVS and JCI (see table).

Get Rich Investments - Perpetual Covered Call Trades

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In January, we kicked off the perpetual covered call strategy. We have started adding new perpetual covered call trades each month to keep the trades fresh with market conditions and opportunities.  For those who are new to this concept, let me share the rationale of this income investment. This strategy was created to produce monthly income with stock dividends and covered call premium.  In addition, there is a protective, blanket put, to ensure the volatility in the market does not affect your return of capital.

August 2012 Monthly Income Plan Update

As we approach the end of the August option expiration cycle, the Get Rich Monthly Income Plan had a great month for investors.

In January, we kicked off the perpetual covered call strategy. For those who are new to this concept, let me share the rationale of this income investment. This strategy was created to produce monthly income with stock dividends and covered call premium.  In addition, there is a protective, blanket put, to ensure the volatility in the market does not affect your return of capital.  We will follow the progress of the perpetual covered calls each month throughout 2012 and I will email premium members with trading directions when an action is required.  Here are some of the results for 2012:

Perpetual Covered Call Returns:

Stock 1 – Oil Company has a YTD total return of 96.1% including dividends and special dividends.

Stock 2 – Drug Store Company with a YTD total return of 36.4% including dividends.

Stock 3 – Technology Company with a YTD total return of 25% including dividends.

We also provide a list of stocks for monthly covered calls.  Here we change the list each month based on investing in the right stock for monthly income.  For the August option cycle, this was a great month for our Monthly covered call trades.  We made monthly returns of 7.55% on UA, 4.33% on LVS, 4.0% on HP, 3.73% on VIAB and 3.58% on CERN.

We have added the covered put trades as an additional way to sell premium and to enter stock positions.  I frequently sell puts to enter a new stock position because (1) I get the stock at a lower price than it is trading at the market. (2) I get to produce income from the premium I receive when selling the puts.  If the stock is above the put strike price at expiration, I keep the premium and have the opportunity to sell more outs or just purchase the stock cheaper because I have the put premium to cover partial costs.  I have used this technique for several months on the same stock before I get the stock put to me.  This creates enough income to really lower the total cost of the stock.  Then, when the stock is put to me, I sell calls (covered) to earn more income until the stock is called away.  Then – rinse and repeat.

For August options, the covered put trades were great this month as all recommendations were winners.  Returns ranged from 2.2% to 3.93% in one month.

For investors wanting to create monthly income, the Get Rich Monthly Income Plan is right for you.  Click here to learn more.

The Biggest Mistake New Call Writers Make

Covered call trading is not like directional trading which has an objective to time the movement of a stock in the direction it is moving.  Covered writing is a game of regular, incremental returns.  The covered call writer’s objective is to collect the option premium for income without taking any damage to the downside of owning the stock.  The secret to success for the call writer is to make smaller, more consistent returns compared to a advanced option trader who makes many bets waiting for a 50% – 100% winner.  The biggest mistake by new call writers is writing a stock solely to capture the fattest time value premiums.

To improve the chances of being successful, the call writer should focus on stock selection.  The covered call trader should focus on 3% monthly returns.  However, a 15% drawdown on a trade will require 5 months of 3% returns to recoup the loss and get back to even.  This is why the Monthly Income Plan focuses on 5 star stocks signaling high quality stocks.

Why avoid the fattest premiums for a measly 3% monthly return?  The short answer is that high premiums often signal high risk, and writing calls on these options without regard to stock quality will eventually decimate your trading account.  There are two reasons that value premium becomes high enough to offer big returns:

1)   The stock is volatile and implied volatility is in line with the stock, or

2)   Implied volatility (IV) is significantly higher than actual volatility.

Simply, the higher the rate of return, the higher either actual or implied volatility (or both) must be on the options.  If two stocks had volatility of 60% we would expect the option premiums to be roughly comparable.  What if one stock had an IV of 25%?  This indicates a market expectation of less volatility in the future but it also means the investor is not getting paid for the 60% volatility risk he is taking on.  If the other stock had IV of 80% then the investor must determine what is causing the IV to be higher than the 60% actual volatility.  This usually indicates that the market is expecting some new event on the stocks such as news, announcement, earning or more.

If the IV is in line with the stock volatility, then the options are priced fairly so the decision comes down to – do you want to invest in the stock.  The rule is to AVOID stocks with spiking IV and look for a different trade.  To be conservative, look to write calls on stocks with a volatility of 40% or less.  If you are experienced and seek more income, look for stocks with volatility between 40% and 60%.  Anything above 60% I would consider high risk so proceed with caution.  You should at least look at the volatility of the stock before you invest to know what the risk of the trade may be over the coming option period.

Covered Call Trade on Deere and Company (DE)

This is a covered write on Deere and Company (DE) for the December 2012 expiration.  Deere & Company provides products and services primarily for agriculture and forestry worldwide. The company operates in three segments: Agriculture and Turf, Construction and Forestry, and Credit.

OPTION STRATEGY:

Look at the December 72.5 covered call. For each 100 shares of Deere and Co (DE) stock you buy, sell one December 72.5 covered call option for a 70.14 (73.64 – 3.50) debit or better. That’s potentially a 3.36% assigned return in 19 days.   That is a 63.66% anualized gain (comparable purposes only) on this short trade.

TRADE TECHICALS:

The technicals for DE are bullish with a weak upward trend.  The stock is under accumulation with support at 74.06. S&P rates this stock 4 STARS (out of five) – buy.

RESEARCH NOTES:

S&P maintains buy opinion on shares of Deere (DE) .  Oct-Q EPS of$1.62, vs. $1.07, beats our est. by $0.23.  Revenue gain of 20% was in line with our est., on strong equipment demand, but costs were controlled better than we expected.  Most encouraging, in our view, is DE’s equipment outlook, with its guidance of 15% growth in FY 12 (Oct.) equipment sales, well in excess of our prior 10% est.  Our long-term view also stays positive, on growing needs for food and infrastructure.  We raise our FY 12 EPS estimate by$1.00 to $8.60, and initiate FY 13’s at $9.60.  We keep our target price at $99, in line with historical relative metrics.

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Covered Call Trade on Expeditors International of Washington, Inc. (EXPD)

Covered call trade on Expeditors International of Washington, Inc. (EXPD).
Expeditors International of Washington, Inc. (EXPD) , today announced that its Board of Directors has declared a semi-annual cash dividend of $.25 per share, payable on December 15, 2011 to shareholders of record as of December 1, 2011.
STRATEGY:  Look at the December 2011 42.5 covered call.  For each 100 shares of Expeditors International of Washington Inc (EXPD) stock you buy, sell one December 2011 42.5 call option for a 40.85 (43.65 – 2.80) debit or better. That’s potentially a 4.68% assigned return including the dividend.
TECHNICAL:  The technicals for EXPD are bullish with a weak upward trend.  The stock is under accumulation with support at 45.19.  S&P rates this stock 4 STARS (out of five) – buy.
RISK:   For those seeking downside protection with a blanket put, buy the May 2012 42.5 Put for 4.10.  Sell the put when you exit the covered call trade.
S&P RESEARCH:  S&P reiterates buy opinion on shares of Expeditors International (EXPD) . Q3 EPS is $0.50, vs. $0.44, $0.01 ahead of our estimate and Capital IQ consensus.  However,$0.03 of EPS came from higher non operating income.  Gross revenues were disappointing, but net revenue growth improved on better airfreight margins.  We think EXPD did a good job in a difficult operating environment, and believe it remains well positioned for an eventual improvement in shipping demand.  We cut our ’11 and ’12 EPS forecasts to $1.80 and $1.98from $1.89 and $2.28.  We cut our target price to $60 from $65, 30X our ’12 estimate, in the middle of EXPD’s historical range.

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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