The holidays can be a hectic time for many, including the markets. There’s so much going on and so much to do that it can be challenging to find time to actively watch the market. A covered call can be a great strategy for when you can’t closely monitor your portfolio. Particularly at this time of year, it may make even more sense to trade them. And here’s a great place to start.
Whether it’s the holiday season or not, who doesn’t like designer clothes at discount prices? Apparently a lot of people do, and that is why this covered-call idea looks like a real bargain.
TJX Companies Inc. (NYSE:TJX) looks like a solid choice this week. The company operates almost 3,000 apparel and home-goods stores, with plans to open more than 100 more by the end of 2012. The retailer’s September same-store sales were up 4% and, in general, the company looks solid on paper with pretty solid fundamentals.
Looking at TJX on a weekly chart over the last two years, the stock has been slowly rising — setting higher highs and higher lows with a few exceptions, which is one definition of a bullish trend. Just last week, the stock made a new 52-week high.
The stock might stall a tad before it continues to go higher but there is no resistance overhead to hold it back. With shares trading here at $63.52, this is a great level to own the shares and sell calls against them for instant income.
Making the TJX Covered Call Trade
Here’s how to initiate a TJX covered call (or buy-write, if you don’t already own the shares) trade to create a quick potential windfall.
Example: Buy 100 shares of TJX @ $63.52 and sell the Jan 65 Call @ $1.35
Cost of the stock: 100 X $63.52 = $6,352 debit
Premium received: 100 X $1.35 = $135 credit
Maximum profit: $283 — that’s $148 ($65 – $63.52 X 100) from the stock and $135 from the premium received if TJX finishes at or above $65 @ January expiration.
Breakeven: If TJX finishes at $62.17 ($63.52 – $1.35) @ January expiration.
Maximum loss: $6,217, which occurs in the unlikely event that TJX goes to $0 @ January expiration.
Managing the TJX Covered Call Trade
The main objective for a covered call strategy is for the stock to rise up to the sold call’s strike price at expiration, which in this case is $65. 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 $65 and looks like it’s going to go much higher — which is a strong possibility with no resistance overhead – then you can buy back the call that was previously sold (Jan 65 Call) and sell a higher strike 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.
It’s nice to have the breakeven point of a trade close to an area of support, and that is the case with this covered call idea. It’s not perfect but there is some support just under $62, which is just below the $62.17 breakeven.
If the stock drops in price more than was anticipated, it might make sense to close out the entire trade (stock and short call) to avoid further losses.
One final thought: Judging how frequently an options trader loses the same way is a great way to measure growth.
