The S&P 500 was trading in an extremely narrow range last week as traders were gearing up for earnings season to kick off. We anticipate seeing much more volatility in the market this week as we begin to learn just how hard the COVID-19 pandemic hit corporate America during the second quarter and what expectations look like for the third quarter.
To prepare for the increase in volatility, we’re recommending another covered call trade on Ball Corporation (NYSE:BLL).
If you, like us, have been holding shares of this consumer cyclical stock, now is a great time to use it to generate some extra income.
No Company is Unaffected
It might seem obvious to say, but it’s worth repeating, almost every company’s second-quarter earnings will be hit by COVID-19, one way or another.
BLL provides aluminum packaging to beverage, food, household product and personal care companies. None of those groups are immune.
For example, the pandemic hit PepsiCo’s (NASDAQ:PEP) beverage sales according to its latest earnings report, and other beverage companies are likely to see the same thing.
But BLL has a lot going for it. Its P/E ratio is strong, and the company is closing new deals with partners like Walmart (NYSE:WMT).
And BLL doesn’t report earnings until Aug. 6, which means there is plenty of time before investors will start to worry about its performance.
Getting Out Early
BLL was hovering just below $72.50 last week, but we don’t think that is going to last. We expect the stock to bounce off support just below $72 and start moving up toward the high it established in early June, which is around $75.
Daily Chart of Ball Corporation (BLL) — Chart Source: TradingView
We think the $75 strike price would give the underlying shares enough room to move higher while also providing enough premium. Unfortunately, the only options available on BLL are monthly, meaning you can either get the July 17 options for a very small premium, or you can sell the Aug. 21 options for a larger premium with more risk.
Though the Aug. 21 options expire after BLL reports earnings, we don’t think that makes them too risky. The extra volatility associated with options that expire after a company reports will allow you to collect extra premium, and there is plenty of time to exit the options for a profit if BLL makes a sharp move to the downside.
If you do sell covered calls expiring after BLL reports on Aug. 6, you’ll need to keep a close eye on their price. Any opportunity to exit early and lock in a profit is critical, and you can always sell another call against your shares later.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.
