Hedge These 3 Blue Chips With Covered Calls

LEAP covered calls can hedge an overbought market

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Hedge These 3 Blue Chips With Covered Calls

Philip Morris International (PM)

PhilipMorris185 Hedge These 3 Blue Chips With Covered CallsPhilip Morris International (PM) is a great choice in this arena. Here we have a massive company selling an addictive — and very popular — global product.

As I write, PM stock trades at $85.51, and the Jan 2015 $87.50 calls are selling for $3.80. First of all, you get a 4.34% premium, which is generous on a large-cap LEAP. So you are protected down to $81.71. Sure, the stock could fall more, but the point isn’t to eliminate all downside risk, but rather to hedge against it.

Now, here’s the beauty of using this particular company: PM stock pays a 4.4% yield, or $3.76 per share. Because you still hold the underlying stock, you collect the dividend as long as that stock doesn’t get called away. If Philip Morris stock ends at $85.51 come expiration, you still will have earned a total of 8.74%. If the stock gets called away, you will have collected the same amount in dividends and premiums anyway.

Thus, for the deal to be a loser for you on the upside, the stock will have to close at $93.07. And you can always buy it back before, during or after it gets called away.


Article printed from InvestorPlace Media, http://investorplace.com/2013/12/hedge-3-blue-chips-covered-calls/.

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