3 Big-Money Covered Calls — GOOG PCLN REGN

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Last week, I wrote about making money on three stocksAlphabet Inc (GOOG, GOOGL), Priceline Group Inc (PCLN) and Regeneron Pharmaceuticals Inc (REGN) — using naked puts, which don’t require you to buy the underlying stock.

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This week, I’m writing about the quasi-opposite on this trade — covered calls.

The exact opposite would be to sell naked calls. That would mean selling the right to someone for them to force you to sell them the stock at a given strike price on or before a given date. Of course, if the final closing price is higher than the strike price, you will be forced to execute a buy trade at that higher price, then immediately sell it at the lower strike price! Yuck. Your loss is theoretically unlimited.

However, if you can afford to buy shares of one of these stocks and sell covered calls against them, you sell the right for someone to buy the stock from you at that strike price. There’s less risk, even if the stock falls below the sale price.

Covered Calls on Alphabet Inc (GOOG, GOOGL)

Covered Calls on Alphabet Inc (GOOG, GOOGL)Alphabet (GOOG, GOOGL) surprised me the other day, as I looked over its valuation.

GOOG has 16.5% annualized earnings per share growth. I award a 10% premium for its brand name, another 10% for free cash flow and 10% for net cash position. FY16 EPS of $34.52 and a $751 stock price translates to only 22 times earnings.

With the premiums I place on GOOG, it comes not only to 21.5 times earnings, but a price/earnings-to-growth ratio barely over 1 for a growth stock. That doesn’t even mention Alphabet’s net cash position of $130 per share.

I consider that to be cheap.

Thus, if you buy GOOG and sell the June $755 covered calls for $32, you make out like a bandit with $3,200. If the stock gets called away, you keep that money plus a little extra for the appreciation. If you get to keep it, you’ve bought Alphabet at a net-cash effective price of $584 per share. That’s an insanely great place to be.

Covered Calls on Priceline Group Inc (PCLN)

Covered Calls on Priceline Group Inc (PCLN)Priceline Group Inc (PCLN) continues to do strong business globally. I think the company is in great shape, so buying PCLN at its present price of $1,317 (or $1,227 net of cash) gives it a price-to-earnings ratio of 18 on earnings growth of 18%.

That’s actually cheap when it comes to owning a growth stock with $4.5 billion of net cash and heaps of free cash flow.

That puts you in a perfect position to buy PCLN stock, then turn around and sell the July $1,315 covered calls for $63. That’s right. You’d collect $6,300 on the trade. If PCLN closes above $1,315, the stock gets called away and you lose $2 on the stock, but net out $6,100.

If the stock does not get called away, and you get “stuck” with it, you’ve bought it at an effective price of $1,252 or $1,162 net of the cash position. You’ll have to sit through only one earnings report on May 4, so even if it tanks, you have 2.5 months for it to recover.

Covered Calls on Regeneron Pharmaceuticals Inc (REGN)

Covered Calls on Regeneron Pharmaceuticals Inc (REGN)Regeneron Pharmaceuticals (REGN) is a recent discovery of mine. Somehow I missed this big pharma play all these years. Now I’ve caught up, and I like what I see. REGN trades at $410 per share. The valuation of this company is somewhat difficult and not straightforward.

What I can say is that it is sitting on solid ground, and the May 27 $410 covered calls are selling for $21.50. In this case, you get paid $2,150 to sit around and see which way REGN will trade. If it goes up and settles above $410 on May 27, your stock gets called away and you keep the money. If it goes down, you get it at $388.50.

Until the correction earlier this year, REGN had not traded that low since November 2014.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2016/04/big-money-covered-calls-pcln-goog-regn/.

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