8:00pm (EST)
1. Market Summary
2. Carrizo Oil & Gas (CRZO) – A Long-term Buy
3. Covered Call Options/ Special Offer
4. Earnings
5. Weekly Wrap Portfolio Update
6. Week Ahead
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3. Covered Call Options (INTC)/ Special Offer
We wanted to take the time this weekend to explain covered calls one more time to show you how powerful they can be. This is a popular option strategy for investors who OWN stocks because it allows them to receive extra income for selling an option against the shares.
We have covered quite a few stocks over the years and we are mainly an option based newsletter. However, we also wanted to use our Weekly Wrap to show you the power of covered calls and how they can be used to lower your cost basis in a stock.
Our goal is quite simple. We look for “flat” stocks that have strong fundamentals and seem to stay in a trading range, and, we look for “momentum” or “breakout” stocks that look poised to continue higher.
This is not an official trade recommendation, yet, but here is how a covered call works.
Let’s say that you own shares of Intel (INTC, $21.97, up $0.43) which have been in a well defined trading range for 5 years and longer. Excluding the trip down to $12 in late 2008 and early 2009, shares have traded in a range of $18-$24 with a pop to $28 since 2006. We like the company’s continued long-term prospects, still, and shares could be on the verge of challenging new 52-week highs with the recent run up to $22 (black line, green circles). This is exactly the type of stock we like to use for our covered call strategies.
To take advantage of a move higher, we could sell a call option on Intel which allows us to keep the premium from the option sale. This limits our upside but lowers our overall cost in the stock. If resistance at $22 is too strong to overtake, then shares would retreat and we would look to write another call option once the other one expired.
Here is how it would play out if we were to buy the stock and sell an Intel October 23 call option (INTC111022C00023000, $0.42, up $0.09) on Monday. These options were up 27% on Friday and we will be following Intel and these options in our Daily publication this week.
1) If Intel stays below the $23 strike price by mid-October – the option will expire worthless and we keep the premium from the option. This lowered our cost basis in the stock to $21.55 if we to get in at current prices.
2) If shares fall below $20 after testing resistance and fall back to support – the option expires worthless, we keep the premium, and we still own the stock. We can then right another call option or wait for shares to rise back above $21.55 before selling another call option.
3) If Intel trades above $23 by mid-October – the option is exercised, and we have to sell our shares for $23, even if the stock is at $24 and at new 52-week highs. We will still make 7% but miss the 9% return from $22 to $24 (without selling the call option) because we had to sell shares at $23.
There are all sorts of variations of the covered call strategy. You can also “write” calls on options that are two months, six months or even a year or two, or even three years out from expiration.
These Intel January 25 calls (INTC140118C00025000, $2.10, up $0.10) do not expire until mid-January 2014 for instance.
You can also sell call options on stocks that are either in-the-money, at-the money, or out-of-the money.
We use our covered call strategy every month on multiple stocks to generate a regular monthly cash flow for our subscribers while lowering their cost basis on solid companies.
Stocks move in only three directions: up, down, or sideways.
With a covered call strategy, you make money if the stock goes up or stays flat. Two out of these three directions work in your favor and we combine this option strategy with our fundamental and technical research to bring you a powerful covered call newsletter.
We have covered dozens of winning stocks since our Weekly Wrap first made its debut back in 2009 and you can read more about some of our homeruns from our Friday afternoon Daily update.
We also included a special offer for you to receive the Weekly Wrap at an incredible for the rest or 2011. A 3-month membership is priced at $199 but you will only pay $99 if you join by midnight Monday night. Current subscribers can also use the special code (BB027CB4CA) to extend their membership and we have also extended our offer in case you want to talk to us or have further questions. Here is a recap of our closed trades for 2011 which brings our track record to 9-0 with more on the way.
VVUS +18%, DNDN +9%, PCX +13%, SGEN +26%, TIVO +34%, REDF +11%, PCX +7, GE +5%, CLNE +13%
Although these gains aren’t as powerful as some of the triple-digit returns our Daily newsletter provides, they are enough to double or triple your money over the next few years.