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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.

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List of Available Weekly Options

 

LIST OF AVAILABLE WEEKLYS OPTIONS (last updated October 26, 2011) – official
Note: CBOE Removed ElPaso Corp. (EP) and added Cree, Inc. (CREE)
Ticker Symbol Name Product Type

List Date

Expire Date

OEX S&P 100 Index (American style) Index, pm-settled, cash

20111027

20111104

XEO S&P 100 Index (European style) Index, pm-settled, cash

20111027

20111104

SPX* S&P 500 Index Index, pm-settled, cash

20111027

20111104

DJX Dow Jones Industrial Average Index, am-settled, cash

20111027

20111104

NDX Nasdaq-100 Index Index, am-settled, cash

20111027

20111104

RUT Russell 2000 Index Index, am-settled, cash

20111027

20111104

EEM iShares MSCI Emerging Markets Index ETF

20111027

20111104

EWZ iShares Brazil Index ETF ETF

20111027

20111104

FAS Direxionshares Daily Financial Bull 3X Shares ETF

20111027

20111104

FAZ Direxionshares Daily Financial Bear 3X Shares ETF

20111027

20111104

FXI Ishares FTSE/Xinhua China Index Fund ETF

20111027

20111104

GLD SPDR Gold Trust ETF

20111027

20111104

GDX Market Vectors Gold Miner ETF ETF

20111027

20111104

IWM iShares Russell 2000 Index Fund ETF

20111027

20111104

QQQ Power Shares QQQ Trust ETF

20111027

20111104

SDS Proshares Ultra Short S&P 500 ETF

20111027

20111104

SPY S&P 500 Depository Receipts ETF

20111027

20111104

SLV iShares Silver Trust ETF

20111027

20111104

SSO Pro Shares Trust Ultra S&P 500 ETF

20111027

20111104

TBT Proshares Ultrashort Barclays 20+ Yr. Treasury ETF

20111027

20111104

TLT iShares Trust Barclays 20+ Yr. Treasury Bond Fd. ETF

20111027

20111104

TZA Direxion Daily Small Cap Bear 3X Shares ETF

20111027

20111104

USO United StatesOil Fund ETF

20111027

20111104

UNG United StatesNatural Gas Fund ETF

20111027

20111104

VXX iPath S&P 500 VIX Short-Term FT ETF

20111027

20111104

XLE Energy Sector SPDR ETF

20111027

20111104

XLF Financial Select Sector SPDR ETF

20111027

20111104

AA Alcoa Incorporated Equity

20111027

20111104

AAPL Apple Corporation Equity

20111027

20111104

ABX Barrick Gold Corp. Equity

20111027

20111104

AIG American International Group Equity

20111027

20111104

AMZN Amazon.com Inc Equity

20111027

20111104

AXP American Express Company Equity

20111027

20111104

BA Boeing Company Equity

20111027

20111104

BAC Bank of America Corp Equity

20111027

20111104

BIDU Baidu Inc. Equity

20111027

20111104

BP British Petroleum Equity

20111027

20111104

C Citigroup Equity

20111027

20111104

CAT Caterpillar Inc. Equity

20111027

20111104

CLF Cliffs Natural Resources Equity

20111027

20111104

CSCO Cisco SystemsInc. Equity

20111027

20111104

CREE Cree Inc. Equity

20111027

20111104

CRM Salesforce.com Inc. Equity

20111027

20111104

CVX Chevron Corp Equity

20111027

20111104

F Ford Motor Company Equity

20111027

20111104

FCX Freeport McMoran Copper CL B Equity

20111027

20111104

FFIV F5 Networks, Inc. Equity

20111027

20111104

FSLR First Solar Inc. Equity

20111027

20111104

GE General Electric Company Equity

20111027

20111104

GM General Motors Company Equity

20111027

20111104

GMCR Green Mountain Coffee Roasters Inc. Equity

20111027

20111104

GOOG Google Inc Equity

20111027

20111104

GS Goldman Sachs Group, Inc. Equity

20111027

20111104

HAL Halliburton Company Equity

20111027

20111104

HD Home Depot Inc. Equity

20111027

20111104

HPQ Hewlett-Packard Company Equity

20111027

20111104

HRBN Harbin Electric Inc. Equity

20111027

20111104

IBM International Business Machines Equity

20111027

20111104

IDCC InterDigital Inc. Equity

20111027

20111104

INTC Intel Corporation Equity

20111027

20111104

ISRG Intuitive Surgical Inc. Equity

20111027

20111104

JNJ Johnson and Johnson Equity

20111027

20111104

JPM J. P. Morgan Chase & Company Equity

20111027

20111104

KO Coca Cola Equity

20111027

20111104

LVS Las Vegas Sands Corp. Equity

20111027

20111104

MA MasterCard Inc. Equity

20111027

20111104

MCD McDonalds Corp. Equity

20111027

20111104

MCP Molycorp, Inc. Equity

20111027

20111104

MGM MGM Resorts International Equity

20111027

20111104

MMM 3M Company Equity

20111027

20111104

MOS Mosaic Company Equity

20111027

20111104

MRVL Marvel Technology Equity

20111027

20111104

MSFT Microsoft Corporation Equity

20111027

20111104

MU Micron Technology Inc. Equity

20111027

20111104

NEM Newmont Mining Corporation Equity

20111027

20111104

NFLX NetFlix Inc. Equity

20111027

20111104

NKE Nike Inc. Equity

20111027

20111104

NVDA Nvidia Corp. Equity

20111027

20111104

ORCL Oracle Corporation Equity

20111027

20111104

PCLN Priceline.com Inc. (new) Equity

20111027

20111104

PCX Patriot Coal Corp. Equity

20111027

20111104

SINA Sina Corporation Equity

20111027

20111104

POT Potash Corp Saskatchewan Equity

20111027

20111104

QCOM Qualcomm Inc. Equity

20111027

20111104

RIMM Research in Motion Limited Equity

20111027

20111104

RMBS Rambus Inc. Equity

20111027

20111104

S Sprint Nextel Corp. Equity

20111027

20111104

SLB Schlumberger Ltd. Equity

20111027

20111104

SLW Silver Wheaton Corp. Equity

20111027

20111104

SNDK SanDisk Corp. Equity

20111027

20111104

SU Suncor Energy Inc. Equity

20111027

20111104

UTX United Technologies Corp. Equity

20111027

20111104

V Visa, Inc. Equity

20111027

20111104

WFC Wells Fargo & Co. Equity

20111027

20111104

WLT Walter Energy Equity

20111027

20111104

WMB Williams Companies Equity

20111027

20111104

WMT Walmart Equity

20111027

20111104

WYNN Wynn Resorts Ltd. Equity

20111027

20111104

X United States Steel Corp. Equity

20111027

20111104

XOM Exxon Mobil Corp Equity

20111027

20111104

YHOO Yahoo Inc Equity

20111027

20111104

* S&P 500 Index (“SPX”) Weekly options trade on CBOE with PM settlement and are listed under the root ticker symbol, “SPXW”
and are commonly included in SPX (traditional) options chains which are AM settled. Separately, the C2 Options Exchange lists
S&P 500 Index options with PM settlement, under the ticker symbol SPXPM, that expire on the same Friday of the month as
traditional SPX options that trade on CBOE.

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Calendar Spread on Kinder Morgan (KMP)

STRATEGY DISCUSSION: Kinder Morgan (NYSE: KMP) ended the last trading session at $76.34. So far the stock has hit a 52-week low of $63.42 and 52-week high of $78.00. KMP has had an S&P 5 STARS (out of 5) ranking since 8/23/2007.  On 4/21/2011 S&P equity analysts set a 12-Month price target of $88.00 for the stock. Kinder Morgan stock has been showing support around $75.18 and resistance in the $76.98 range. KMP is part of the S&P 5 STARS stock list.  A 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 KMP Jan ’13 67.50 Call and selling the Jan ’12 75 call for a $6.00 debit. The strategy has an 82 day life and would provide 3.72% downside protection and a 25.00% assigned return rate for an 111.28% annualized return rate (for comparison purposes only). This strategy has a 3 Key (out of 5) Moderate Relative Risk ranking.  Kinder Morgan has a current annual dividend yield of 5.91%.

TRADE: A CALENDAR SPREAD that involves selling the January ’12 75 call and buying the January ’13 67.50 call should cost $66.89 less per share than the covered call and potentially yield a 25% return if the stock stays above $75 through expiration.  S&P set a $88.00 12-Month price target for KMP which is currently trading at $11.66 below that target.  With the calendar spread trade, the trade cost could be reduced and returns potentially improved if the stock stays above $73.55 but lower than $95.43.

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 $75 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 67.50 call could drop quickly.

Get more calendar spreads.

Kinder Morgan Energy Partners Stock Chart

Kinder Morgan Energy Partners Stock Chart by YCharts

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

Click to enlarge

Covered Call Write on Caterpillar (CAT)

Caterpillar (CAT) reported blow-out earnings on October 24. CAT jumped 5.7 percent to $92.39 and led the Dow higher after the heavy equipment maker reported a quarterly profit that topped estimates on record revenues. Excluding the impacts of the recent acquisition of Bucyrus International, profit was $1.93 per share, up 58 percent from a year ago. Sales and revenues excluding Bucyrus were $14.581 billion, up 31 percent from the third quarter of 2010. Excluding the impacts of Bucyrus, it was an all-time record quarter for both sales and revenues and profit.

STRATEGY: Look at the December 2011 92.50 covered call. For each 100 shares of Caterpillar (CAT) stock you buy, sell one December 2011 92.50 covered call option for a $88.85 (92.35 – 3.50) debit or better. That’s potentially a 4.11% assigned return in 25 days or a whopping 60% annualized return.

TECHNICALS: The technicals for CAT are bullish with a possible trend reversal. The stock is under accumulation with support at 80.76. S&P rates this stock 4 STARS (out of five) – buy.

RISK: The stock has to drop 3.8% to threaten the breakeven point.

PROTECTIVE PUT: For those wishing to protect your downside, buy the May 2012 90 put for $10.35. Buy one put for each 100 shares of stock you own. Sell the put when you exit the covered call trade.

S&P RESEARCH NOTES: S&P reiterates buy opinion on shares of Caterpillar (CAT) . Q3 adjusted EPS of $1.93, vs. $1.22, beats our forecast by $0.19. Revenue gain of 41% was above our 36% forecast, on higher demand in almost all products and geographies. Record Q3 sales and profit results were particularly impressive to us in light of economic challenges in developed nations. CAT’s current trends also lead us to expect ongoing demand growth in ’12. We lift our ’11 EPS estimate $0.05 to $7.35, and ’12’s by $0.10 to $9.20. In light of growing economic uncertainties, however, we trim our target price by $13 to $129, on our revised historical P/E analysis.

Performance of Caterpillar (CAT) stock

Click to enlarge

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