Make a Call on This Financial Planner

by John Kmiecik | November 8, 2012 6:45 am

Now that the presidential election is over, it’s back to business. It seems like quite a few investors sat on the sidelines until the election was over, but the excuses are over, and it’s time to return to trading. For one, you could consider this covered call trade on one stock that didn’t take the election off.

Ameriprise Financial (NYSE:AMP[1]) provides customers with a wide range of financial products and services in the U.S. and internationally. AMP recently announced earnings — third-quarter net income dropped nearly in half after the company recalculated the worth of its insurance and annuities. On the plus side, Ameriprise increased its quarterly dividend (it now yields north of 3%) and said it would buy back up to $2 million worth of its shares.

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Despite the fact its earnings were less than anticipated, Ameriprise stock reached its 52-week high earlier this week. Overall, AMP has been on a grinding uptrend since the beginning of June, making higher pivot highs with a couple of exceptions.

The next resistance level the stock will face is right around $65, which was a high the stock set in early 2011. Considering where the stock currently is trading, it has some room to move higher.

(NYSE:AMP) — $58.60

Example: Buy 100 shares of AMP @ $58.60 and sell the December 60 call @ 1.30.
Cost of the stock: 100 X 58.60 = $5,860 debit.
Premium received: 100 X 1.30 = $130 credit.
Maximum profit: $270 — that’s $140 (60 – 58.60 X 100) from the stock and $130 from the
premium received if AMP finishes at or above $60 @ December expiration.
Breakeven: If AMP finishes at $57.30 (58.60 — 1.30) @ December expiration.
Maximum loss: $5,730, which occurs in the unlikely event that AMP goes to $0 @ December expiration.

Trade Management

The maximum profit potential for this covered call strategy is for the stock to just rise up to the sold call’s strike price ($60) by December expiration. The stock moves up the maximum amount without being called away because of the short strike, and profits are enjoyed on the shares and the option premium. The process can be duplicated for the next expiration if desired using either the same 60 strike if the outlook on Ameriprise is neutral, or a higher strike if the outlook continues to be bullish.

If AMP makes a move past its 52-week high and past the $60 strike well before December expiration — which is a possibility with more than 40 days left until expiration — the call option can be bought back and a higher strike can be sold against the position to avoid assignment. This will allow AMP to remain in the portfolio and also give the position a chance to increase its return, especially if the stock moves higher.

If the upward trend doesn’t continue and Ameriprise 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.

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

  1. AMP:

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