Trade #3 – Marathon Oil
Recommended by Tyler Craig, Tyler’s Trading
Though the covered call appears to be a simple strategy, there are actually a number of ways in which traders go about selecting the right candidate.
Some take the more-aggressive route and buy cheaper, more-volatile stocks that boast high-potential returns for covered-call sales. Others look to stable dividend-payers that provide a more-conservative approach but smaller-potential returns.
Perhaps the best approach is to strike the right balance between the two. That is, find a stock that appears stable, yet still offers options with high enough premiums to make the covered-call trade worthwhile.
Marathon Oil (NYSE:MRO) is one stock in the energy space offering a compelling setup. From a charting standpoint, it has recovered quite nicely from its October lows and has stabilized above its rising 50-day moving average.
Traders could buy the stock around $28.30 and sell the MRO Jan 29 Calls for $1.06 or better. The maximum potential profit if MRO resides above $29 at January expiration comes out to a 6.5% return.
Trade #4 – Southern Copper
Recommended by John Jagerson, SlingShot Trader
A market disruption creates opportunities for investors looking for the best stocks on sale. However, volatility can be unnerving regardless of the time frame of your outlook.
Combining a covered call and a value stock can help you take advantage of a good investment with a simultaneous hedge and/or income opportunity.
Southern Copper (NYSE:SCCO) has been growing lately despite the market, and it is a great example of this kind of trade.
The stock is forming an inverted head-and-shoulders pattern (very bullish), and qualifies as a strong fundamental value. Plus, it offers an 8% dividend yield. We expect SCCO to rally strongly when economic fundamentals turn the corner and basic material stocks start to take off.
We like the current entry opportunity before the breakout below $33 per share. Right now this entry could be combined with a covered call for a “buy-write” order. Selling the SCCO Jan 32 Calls for $1.30 a share can provide a yield of 4% if the stock is not called away. That 4% can also be considered a hedge against volatility over the next month if the stock dips a little.
Reselling a new option each month could really amplify your annual performance while you wait for the market to turn around. Don’t worry if the stock gets called out at $32 per share, based on current prices ($31) — that would create a profit of 7.4% in a little over a month.
You can then take your profits off the table and buy back in when the stock dips a little. Not a bad way to “manage” a valuable stock while the market sorts itself out.