by John Kmiecik | December 29, 2011 8:15 am
Who doesn’t need some energy this holiday season? The holidays can be a fun and spirited time, but they can also be extremely draining with all the shopping, cooking, cleaning, planning and other activities.
When I think of energy (as in, the kind that provides fuel for the body), Hansen Natural Corp. (NASDAQ:HANS) — the maker of Monster Energy drinks – comes to mind. The company is very sound fundamentally with a nice balance sheet and a 34% market share. Recently the company just signed a distribution agreement with Coca-Cola (NYSE:KO).
For the last three months, HANS has been setting higher lows and equal highs for the most part on the daily chart. The stock has really struggled to get over the $97 area for some reason. Selling the $95 strike makes sense for this covered call idea because the stock will probably not go much higher than that otherwise a more bullish strategy could be implemented. The stock has some support in the $90 to $92 area.
Making the HANS Covered Call Trade
With HANS trading at $91.66, you could…
Example: Buy 100 shares of HANS @ $91.66 and sell the Jan 95 Call @ $1.45
Cost of the stock: 100 X $91.66 = $9,166 debit
Premium received: 100 X $1.45 = $145 credit
Maximum profit: $479 — that’s $334 ($95 – $91.66 X 100) from the stock and $145 from the premium received if HANS finishes at or above $95 @ January expiration
Breakeven: If HANS finishes at $90.21 ($91.66 – $1.45) @ January expiration
Maximum loss: $9,021, which occurs in the unlikely event that HANS goes to $0 @ January expiration
Managing the HANS Covered Call Trade
The main objective for a covered call strategy is for the stock to just rise up to the sold call’s strike price at expiration, which in this case is $95. The stock moves up the maximum amount without being called away, gains are enjoyed on the shares and the sold call expires worthless.
If the stock moves past the $100 barrier and looks like it’s going to go much higher, then the call that was previously sold (HANS Jan 95 Call) can be bought back and a higher strike can be sold against the position to avoid assignment. This will allow the stock to remain in the portfolio and also give the position a chance to increase its return.
The breakeven point ($90.21) on this covered call idea is very close to a support level at around $90. If the stock decreases in value, support will hopefully do its job and keep shares from heading much lower.
If the stock drops in price more than was anticipated, it might make sense to closeout the entire trade (stock and short call) to avoid further losses.
Happy New Year!
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