Covered Calls: Portfolio Recovery Associates (PRAA)
We’ll start with the smaller one that I’m very familiar with — Portfolio Recovery Associates (PRAA).
I love PRAA for many reasons. The business — it’s a debt collection company that is one of the big players in a sector where compliance and regulation are forcing smaller players to get acquired or get out — is attractive.
Portfolio Recovery Associates has great growth prospects, keeps delivering on earnings, gets terrific returns out of its portfolio of debt purchasers, and is expanding also through acquisition.
It also is in that sweet spot of the $40-$60 stock price range, and is a small-cap, that generates great options premiums.
PRAA stock trades for around $58.60. The May 60 call trades at about $1.80. To be conservative, I’ll only include the premium toward the $1,000 goal (which you’d get if the stock essentially trades flat), but I’ll definitely be happy with any additional capital gains.
Selling three of these covered calls generates $540 in income, or just about 3% for a holding period of five weeks, so that’s a little over 30% annualized (If the stock does get called away, tack on another $1.40 per share, or $420).