Shares of Deere & Company (NYSE:DE) have been plowing higher following last week’s hot earnings announcement.
All told, DE stock is up 5 percent in the past three trading sessions, which is an outsized move for the otherwise gradual moving stock. The newfound strength has elevated the attractiveness of Deere & Company’s stock chart a notch or two, but a number of resistance levels yet remain overhead.
A quick glance at the daily chart reveals this week’s high-volume breakout over the $92.50 level. The short-term trend is undoubtedly up and gaining momentum, as suggested by the sharp rise in the 20-day moving average.
But if we take a step back and assess the weekly chart, much work remains for the heavy equipment company. The $95 zone has proved impenetrable over the past few years and could stymie DE stock’s current rally attempts.
One way to capitalize on the current situation is to sell covered calls.
Covered Calls With DE Stock
The covered call play consists of selling one call option for every 100 shares of DE stock you own. Think of it as a way to get paid for your willingness to sell your stock at a certain price. If you tactically sell covered calls after your stock has rallied and use a call option with a strike price you wanted to unload shares at anyway, it increases your overall harvest.
For example,with DE stock perched at $94.36 you could sell the Jul $95 calls for around $1.80. In doing so you capture $180 of income for every 100 shares of stock you own. If DE stock remains at or below $96.80 ($95 plus $1.80) the covered call will deliver a superior return to outright stock ownership.
Should the $95 zone flex its muscles again and prevent Deere & Company from rallying any further, you can at least get paid the $180 of premium for your willingness to unload shares at that price for the next seven weeks. The extra income will also act as downside protection should DE stock suffer from any profit-taking.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
