A strategy idea for options trading investors.
TRADE COMMENTARY
Target (NYSE: TGT) is a discount super store. It is operating in a soft economy but the school season is coming up fast. Students of all ages will be trying to save money any way they can, and this will mean going to discount retailers that are one-stop shops. From groceries to clothes to notebooks and pens, Target sells it all. People are only concerned with buying what they need, and that is what Target is in the business of selling.
We believe that a covered call on Target is a defensive play that could pay off. By selling a call against a long stock position, we are giving ourselves a downside buffer while also allowing for moderate appreciation of the shares. In times like these it is important to be defensive, to reduce your risk, and know where your exposure is.
OPTIONS TRADE — TARGET — COVERED CALL
DATE: Tuesday, June 28, 2011
STOCK/INDEX: TGT
STOCK PRICE: 46.50
OPTION PLAY: Covered Call
BUY/STRIKE/MONTH/PRICE: 100 Shares @ 46.50
SELL/STRIKE/MONTH/PRICE: 1 October 48 Call @ 1.65
NET COST: 46.50 – 1.65 = $44.85 per contract
(46.50 x 100)- (1.65 x 100) = $4,485
BREAKEVEN: 46.50 – 1.65 = $44.85
MAX PROFIT: (48 + 1.65) – 46.50 = $3.15
MAX LOSS: 46.50 – 1.65 = $44.85 (if stock goes to 0)
CALL AWAY % RETURN: 3.15/44.85 = 7.0% Return
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.
