Stratasys Is Sitting Pretty for a Covered Call

by John Kmiecik | January 10, 2013 8:48 am

Traders often look to sectors that are performing well for bullish trade ideas. But sometimes that can be a little misleading, too. Just because a sector is performing well doesn’t mean that every stock within it is doing the same and vice versa. Here’s a trade idea from the industrial goods sector that looks pretty good in 3D.

The theory on this covered call trade example is this:

Stratasys (NASDAQ:SSYS[1]) manufactures and sells three-dimensional prototyping systems for automotive, aerospace and industrial use. It has been able to lower its prices and improve its 3D products, which have boosted earnings.

The stock has been on a bullish trend since the fall of 2011. Yes, it has pulled back at times but it has shown some resiliency and recovered to keep the uptrend in tact. Wednesday SSYS hit another all-time high, and so far it has shown no sign of slowing down in 2013.

SSYS — $86.70

Example: Buy 100 shares of SSYS @ $86.70 and sell the January 90 call @ 80 cents.

Cost of the stock: 100 x $86.70 = $8,670 debit.

Premium received: 100 x 80 cents = $80 credit.

Maximum profit: $410: That’s $340 ($90 – $86.70 x 100) from the stock and $80 from the premium received if SSYS finishes at or above $90 @ January expiration.

Breakeven: If SSYS finishes at $85.90 ($86.70 80 cents) @ January expiration.

Maximum loss: $8,590, which occurs in the unlikely event that SSYS goes to $0 @ January 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 ($90) by January expiration in just over a week. 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 so desired using either the same 90 strike if the outlook on the stock is neutral or a higher strike if the outlook and the stock continues to be bullish.

With just over a week left until January expiration, it’s doubtful that SSYS will move much past $90. If it does, then the 90 strike call option can be bought back, and a higher strike with February expiration can be sold against the position to avoid assignment. This will allow the stock to remain in your portfolio and also give the position a chance to increase its return, especially if SSYS moves higher.

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

 As of this writing, John Kmiecik didn’t own any securities mentioned here.

  1. SSYS:

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