MOO Options Almost Safe as Milk

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A strategy idea for options trading investors.

TRADE COMMENTARY:

With the global debt markets in disarray and the very real possibility for massive haircuts for bond holders it is time to once again get in the fetal position and go for the safety of commodities.

The Market Vectors Agribusiness ETF (NYSE: MOO) seeks investment results that correspond to the price and yield of the DAX global Agribusiness Index, a modified market-capitalization index.

Agribusiness isn’t always the most exciting sector but it is a steady winner because the companies fulfill a basic human need – we all have to eat. This popular exchange-traded fund is made up of companies that derive at least 50% of their income from the ag business.

Although today’s markets can be volatile we try to limit the losses in this position by buying the underlying exchange-traded fund and selling out-of-the-money calls. Again, in these uncertain times every trade, whether bullish or bearish, should have defined risk and loss parameters.

OPTIONS TRADE:

DATE:                                           Tuesday, June 21, 2011

STOCK/INDEX:                               MOO

STOCK/UNDERLYING PRICE:        50.75

OPTION PLAY:                               Covered Call

BUY/STRIKE/MONTH/PRICE:         100 Shares @ 50.75

SELL/STRIKE/MONTH/PRICE:        1 August 53 Call @ 1.10

NET COST:                                      50.75 – 1.10 = $49.65 per contract or (50.75 x 100) – (1.10 x 100) = $4,965

BREAKEVEN:                                    50.75 Stock – 1.10 premium = $49.65 (price of underlying)

MAX PROFIT:                                    (53 strike + 1.10) – 50.75 stock = $3.35

MAX LOSS:                                        50.75 stock – 1.10 premium = $49.65 (50.75 x 100) – (1.10 x 100) = $4,965

CALL AWAY % RETURN:                   3.35/50.75 = 6.7% Return

  • Remember – 1 option contract equals 100 shares of the underlying/ETF.

Stutland Equities is a premier futures and options trading company on the Chicago Board Options Exchange. Founded in 2005 and headquartered in Chicago, Stutland Equities specializes in volatility arbitrage across multiple asset classes.


Article printed from InvestorPlace Media, https://investorplace.com/2011/06/moo-options-etf-covered-call/.

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