The North American Electric Reliability Council (NERC) announced the demand for electricity is expected to increase 19 percent over the next ten years, but electrical power capacity is projected to only increase 6 percent over the same time period.
The NERC was organized after an electrical blackout in the Northeast in 1965, and was beefed up by the U.S. Congress after a subsequent electrical grid blackout in 2003.Anytime there is a resource with significantly increasing demand and a lagging supply, the price of the resource tends to skyrocket.
This increasing demand with lagging supply economic phenomenon can be witnessed by the recent price spikes in oil, natural gas and other basic commodity materials like aluminum. Supply usually catches up, but in the meantime, the companies involved in the development and delivery of the resource experience enhanced appreciation in their stock prices.
Based on this, a covered call investing strategy for electrical utilities may be in order over the next few years. Using PowerOptions stock options search tool SmartSearchXL to search for covered call investing positions in electrical utility companies on October 16, 2006 with all stock options expiring November 17, 2006 (November stock options expiration day), the following positions were found:
|SmartSearchXL Covered Call Search for October 16|
|NRG||47.49 (+0.22)||NRGKI||06 NOV 45.0 (36)||3.5||7.4||2.3||2.3|
|TXU||61.59 (-0.17)||TXFKL||06 NOV 60.0 (36)||3.2||5.2||2.8||2.8|
|RRI||12.57 (unch.)||RRIKV||06 NOV 12.5 (36)||0.5||4.0||3.6||3.6|
|TXU||61.59 (-0.17)||TXFKZ||06 NOV 62.5 (36)||1.8||2.9||3.0||4.5|
Several electric utility covered call investment strategy positions were returned with potential returns in the range of approximately 2.5% to 4.5% (not bad for a 5 week return) and downside protection ranging from around 3% to 7.5%.
The search results illustrate the reason the covered call investment strategy is considered conservative, as all of the positions have “downside protection” of at least 2.9% (see “Aggressive Strategy for the Conservative Investor” for more information). The downside protection is the percentage that a stock can decline in value before the position will incur a loss. Downside protection is simply the option premium divided by the stock price. The NRG, RRI and first TXU positions are In the Money (ITM); therefore the percent of unchanged in price and the percent if assigned are equal in value.
Out of the money (OTM) calls offer greater upside potential, but require the stock price to appreciate in order to realize the greater returns as in the case of the second TXU position. OTM calls are often more a play on stock appreciation rather than covered call income and this can be seen by the higher return if assigned and the lower percent downside protection.
PowerOptions provides Internet based tools for analyzing stock options with specific search criteria and for finding potentially lucrative option income. For those seeking to execute a covered call investment strategy for their personal portfolios, PowerOptions provides an Internet based search engine for finding potentially lucrative income producing covered call stock options positions.
[tags] covered call investing, covered call investment strategy, investment strategy, option income, poweroptions, stock options [/tags]