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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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How To Avoid the Option Premium Trap

Many investors get too excited while seeing the high potential return based on high premiums.  There is always a reason that a call premium is higher than normal.  It may be a fad stock, potential takeover target or expecting some news release that may affect stock price.  The time premium on these stocks is big making them tempting to write.  It is best to pass up these volatile stocks for more stable and fundamental stocks.  In call writing, your gains are topped but loses are not limited to just the net proceeds of the trade.

There is no option premium large enough to protect you from a big downside break.  When you hear stories of investors being wiped out in writing calls, it is usually because they were writing for fat premiums.  The basic rule is to stick to stable stocks that you would feel comfortable at the net price paid for the optionable stock.

The exchanges are filled with potential stocks to write calls on.  The best way to find candidates is through a process of elimination.  For example, start with a list of stocks ranked 5 stars by S&P.  Then eliminate those with a high volatility such as 50% or higher.  Then determine which stocks you want to own to sell calls on the stock.  Then you can diversify the stocks you select from different sectors and industries for more safety.


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