by John Kmiecik | January 11, 2012 8:14 am
Nike Inc. (NYSE:NKE) has been slowly on the move up. The company just revealed its fourth-quarter earnings, showing that demand for their product is still there. Its revenue in the fourth quarter rose 28%.
The company recently announced plans to build a 600,000-square-foot regional headquarters in Shanghai, to get better-positioned to serve the growing Chinese market. Most analysts have a price target over $100 on the stock.
NKE is almost exactly what to look for when you’re hunting for covered-call candidates. The stock is trending up ever so slightly and has room to go higher because it has no real overhead resistance.
What it does have overhead is the $100 barrier, which might hold the stock down a tad in the near term. Sometimes $100 can be a psychological barrier for a stock to get through. In the meantime, that makes this an excellent place to capture monthly option premium before the stock makes its next move.
Making the NKE Covered Call Trade
With NKE trading here at $98.47, you can…
Example: Buy 100 shares of NKE @ $98 and sell the NKE Feb 100 Call @ $1.85
Cost of the stock: 100 X $98.47 = $9,847 debit
Premium received: 100 X $1.85 = $185 credit
Maximum profit: $338 — that’s $153 ($100 – $98.47 X 100) from the stock and $185 from the premium received if NKE finishes at or above $100 @ February expiration.
Breakeven: If NKE finishes at $96.62 ($98.47 – $1.85) @ February expiration.
Maximum loss: $9,662, which occurs in the unlikely event that NKE goes to $0 @ February expiration.
Managing the NKE 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 $100. The stock moves up the maximum amount without being called away, gains are enjoyed on the shares and the sold call expires worthless.
In the event the stock breaks the $100 barrier and looks like it’s going to go much higher, then the call that was previously sold (February 100) 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.
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 at around $96, which is just below breakeven.
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.
Just do it!
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