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7 Covered Call Trades on Today’s Hottest Names

Create your own rally right now -- no Santa needed!

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As year-end draws closer, investors are hoping jolly Old Saint Nick will remember to load up his sleigh with a nice rally with a shiny bow on top for the world indices.

But as the holidays approach, we wouldn’t be surprised if Santa gets spotted in a hammock in Key West, taking a rest from the markets this year because even he just can’t fight the tape.

After all, look at the stories that are set to shape 2012 — the recent Euro Summit’s lackluster outcome that only served to doom the currency it was designed to save … Iran closing off a critical waterway for passage of the world’s oil tanker traffic … and more of the same (and that’s nothing much) from the Fed.

Add it all up, and it’s easy to see why traders would be happy with a lump of coal — at least energy prices are on the rise!

But there’s no reason for despair. The biggest-name stocks are still standing. They may not be rising — at least, not as fast as we’d like. But that makes this the perfect time to sell call options against them for collecting income, lowering our cost basis or creating our own capital appreciation.

And so, today our OptionsZone experts have pooled their favorite covered call (or, buy-write) trades for you to ensure a happy, healthy and — best of all — prosperous new year!

Here are seven trades you can make right now without Santa even having to gas up the sleigh to deliver the gains…

Trade #1 – McDonald’s

Recommended by John Kmiecik,

Just because a company’s name is globally recognized, doesn’t mean that it makes sense to invest in that company. But in this particular instance, it might. Not many companies are recognized around the world more than this one.

It is probably safe to say that McDonald’s (NYSE:MCD) name is common in most households. Not only does this company market itself effectively, but it has the financial numbers to back it up.

Just recently, the company reported a larger-than-expected rise in same-store sales. Even overseas, same-store sales grew more than expected. If the economy stays the way it has been, the company may continue to benefit because of its relatively inexpensive food options.

The theory on this covered call trade example is this:

Looking at MCD on a monthly chart over the last nine years, the stock has been slowly rising — setting higher highs and higher lows with a few exceptions. Just as recently as Monday, shares were at their all-time high just below $99.

The stock might hesitate before going higher because of the imaginary resistance associated with getting above a $100 level for the first time. This should be just a temporary hurdle, if it happens at all for the stock.

Making the MCD Covered Call Trade

With MCD trading here at $98, here’s how you can make option income with your existing shares or by purchasing them now as part of a buy-write strategy (where you buy the stock and sell the call together) that you establish today.

Example: Buy 100 shares of MCD @ $98 and sell 1 Jan 100 Call @ $1.25

Cost of the stock: 100 X $98 = $9,800 debit

Premium received: 100 X $1.25 = $125 credit

Maximum profit: $325 — that’s $200 ($100 strike – $98 stock price X 100) from the stock and $125 from the premium received if MCD finishes at or above $100 @ January expiration.

Breakeven: If MCD finishes at $96.75 ($98 – $1.25) @ January expiration.

Maximum loss: $9,675, which occurs in the unlikely event that MCD goes to $0 @ January expiration.

Managing the MCD Covered Call Trade

The main objective for a covered call strategy is for the stock to just rise up to the sold call’s strike price at expiration, which in this case is $100. The stock moves up the maximum amount without being called away, gains are enjoyed on the shares and the sold call expires worthless.

If the stock moves past the $100 barrier and looks like it’s going to go much higher — which is a strong possibility with no resistance overhead — then the call that was previously sold (January 100) 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 ($96.75) on this covered call idea is very close to a support level at around $96.50. If the stock decreases in value, support will likely do its job and keep shares from heading much lower.

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.

NEXT: Trade #2 – Google

Article printed from InvestorPlace Media,

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