Trading Ideas – ALXN Pharmaceutical Covered Call
November 12, 2014 MarcoTrade
Growth stocks are exciting and may present great profit opportunities. They come however with a higher implicit risk. One way to mitigate such risk is to sell monthly at-the-money or slightly out-of-the-money calls to pocket some cash and reduce the exposure to a possible volatile trend.
Such a strategy seems appropriate for Alexion Pharmaceutical right now. The stock has broke out of a lenghty consolidation 3 weeks ago. It has been trading in a narrow range for 11 straight sessions now. The stock doesn’t seem to be able to break the $200 level quite yet and I believe we can use this opportunity to have time erosion make us some money.
If we buy ALXN at $194.92 (Tuesday 11/11 close) and sell the December 20th 2014 $195 at-the-money call for $7.60 we are going to have a breakeven point of $187.32 at expiration. Any stock value above that would give us a profit. The call yields a highly remunerative 3.9% for slightly over one month. That is what we would make if ALXN price does not change from here. If the stock closes at or above $195, our Call option will be exercised. We would keep the $7.60 plus the $0.08 (difference between strike price and current stock price).
For a slightly more bullish strategy, we could sell the December 20th 2014 $200 out-of-the-money call for $5.25. We are going to have a breakeven point of $189.67 at expiration. Any stock value above that would be profit. This call yields a nice 2.69%. If the stock closes at or above $200, our Call option will be exercised. We would keep the $5.25 plus the $5.08 (difference between strike price and current stock price) for a profit of $10.33 per stock or 5.3% in 40 days. Just think that if we were able to do so each month for the entire year we would easily have a 40% annual return with the added benefit of limiting exposure!
Remember however that a covered call is only a good strategy if you believe the stock will move sideways or slightly up. If you have a winner, it might be a bad decision to limit your profit opportunities.
Categories: Trading Ideas
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