An Options Trade to Feel Good About

by John Kmiecik | November 21, 2012 7:15 am

Many out-of-work Americans have had a hard time finding desirable employment over the past several years. Hope of finding work with an enviable employer has sometimes turned to settling for a job.

If you are fortunate enough to be employed, it’s a bonus knowing that your employer has your best interests in mind and that your rights are being protected.

This covered call idea might make you feel good about investing in this company, as it goes above and beyond to protect its employees and consumers’ rights:

Aon PLC (NYSE:AON[1]) provides risk management services, human resource consulting and outsourcing services globally. The company just announced that, for the sixth straight year, the firm has received a perfect score in the Corporate Equality Index — this means the company has fully inclusive equal employment opportunity policies, among other rights and provisions. Aon also has been recognized for its commitment to mothers and veterans for the past two years.

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That might be all well and good, but how is the stock performing?

Since the end of July, AON shares have slowly been moving higher in an uptrend. In November, the stock has struggled to close above a resistance area located just above $56 — until this week. The stock now is trading at all-time highs, and without any further resistance overhead, it possibly could move even higher.


Example: Buy 100 shares of AON @ $56.95 and sell the December 57.5 call @ 75 cents.
Cost of the stock: 100 X 56.95 = $5,695 debit.
Premium received: 100 X 0.75 = $75 credit.
Maximum profit: $130 — that’s $55 (57.50 – 56.95 X 100) from the stock and $75 from the premium received if AON finishes at or above $57.50 @ December expiration.
Breakeven: If AON finishes at $56.20 (56.95 – 0.75) @ December expiration.
Maximum loss: $5,620, which occurs in the unlikely event that AON goes to $0 @ December expiration.

Trade Management

The best-case scenario for this covered call strategy is for Aon stock to just rise up to the sold call’s strike price ($57.50) by December expiration. The stock moves up the maximum amount without being called away because of the short strike, and gains are enjoyed on the shares and the option premium. The process can be duplicated for the next expiration if so desired using either the same 57.5 strike or a higher one if Aon looks like it will continue to move higher.

If AON continues to set all-time highs and passes the $57.50 area well before December expiration, the call option can be bought back, and a higher strike (for example, a 60 strike) can be sold against the position to avoid assignment. This will allow the stock to remain in the portfolio and will give the position a chance to increase its return.

The breakeven point on this trade idea is close to the old resistance area, which should act as support and keep the stock from moving lower.

If Aon doesn’t continue trending higher and drops in price more than was anticipated, it might make sense to close the entire trade (stock and short call) to possibly avoid further losses.

As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.

  1. AON:

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