Banks have had a rough go of it for the last few years. Of course, some have fared better than others from both a business and a stock perspective. Part of the reason an investor or trader will implement a covered call is because he or she thinks the stock will rise over time. And today’s covered call play is a bank that’s been around for 90 years and whose technicals look as if they may be pointed higher.
PNC Financial Services Group (NYSE:PNC), the sixth-largest bank as measured by U.S. deposits, is expected to complete its $3.45 billion purchase of Raleigh-based RBC Bank USA in March of this year. This will provide PNC with an additional 400 branches, and the company says it does not intend to issue any new shares of stock as part of the purchase agreement.
That could be a positive thing for the price of the current shares.
Technically the stock has been on a bullish uptrend since the end of November. Currently, PNC has pulled back to an area of support in the $58 – $59 area. If support can hold up the stock and keep it from falling lower, this could be a sweet spot to do a buy-write.
Making the PNC Covered Call Trade
With PNC trading at $59.52, you can…
Example: Buy 100 shares of PNC @ $59.52 and sell the PNC Feb 60 Call @ $1.15
Cost of the stock: 100 X $59.52 = $5,952 debit
Premium received: 100 X $1.15 = $115 credit
Maximum profit: $163 — that’s $48 ($60 – $59.52 X 100) from the stock and $115 from the premium received if PNC finishes at or above $60 @ February expiration.
Breakeven: If PNC finishes at $58.37 ($59.52 – $1.15) @ February expiration.
Maximum loss: $5,837, which occurs in the unlikely event that PNC goes to $0 @ February expiration.
Managing the PNC 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 $60. 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 trades well over $60 and looks like it’s going to go much higher, then the call that was previously sold (the February 60) 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 of this trade is right at the lower end of the support range.
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.