The CME (Chicago Mercantile Exchange) futures exchange announced it is planning to buy competitor CBOT (BOT) for around $8 billion. For many years futures exchanges have provided farmers, ranchers and other agricultural-product producers the ability to lock in the price they will receive for their products.
In recent years, the futures exchanges have also been providing more exotic derivative products. For example, the CME provides equity, foreign exchange, interest rate, weather, oil, natural gas and real estate derivatives. Case in point, suppose an entity is planning on making a large real estate purchase financed with a mortgage and desires to lock in the interest rate, derivatives provide the capability for the entity to lock in the interest rate.
Derivatives are useful for locking in the price of real estate, fuel and many other products as well.The volume on the futures exchanges has exploded over the last few years, and not just because farmer Jones wants to lock in the price of his wheat. Hedge funds have increasingly been using the derivative markets to attempt to earn profits for their customers.
Increasing volumes in the futures markets are expected to continue and with the acquisition of BOT, CME appears to be an excellent candidate for executing a covered call investment strategy. A covered call investing strategy search was performed for CME using PowerOptions SmartSearchXL Internet based stock options search tool on October 17, 2006 and the following covered call investing stock options investment opportunities were found (all stock options expiring in November):
| SmartSearchXL Covered Call Search for October 17 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock Sym |
Stock Price 10/17/06 |
Option Sym |
Expire &Strike |
Opt Bid |
%Dnsd. Prot |
%If Unch. |
%If Asgnd. |
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| CME | 516.34 (+13.09) | CNMKD | 06 NOV 520.0 (32) | 19.8 | 3.8 | 4 | 4.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CME | 516.34 (+13.09) | CNMKB | 06 NOV 510.0 (32) | 24.1 | 4.7 | 3.6 | 3.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CME | 516.34 (+13.09) | CNMKT | 06 NOV 500.0 (32) | 31.7 | 6.1 | 3.2 | 3.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CME | 516.34 (+13.09) | CNMKF | 06 NOV 530.0 (32) | 14.4 | 2.8 | 2.9 | 5.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CME | 516.34 (+13.09) | CNMKQ | 06 NOV 490.0 (32) | 36.7 | 7.1 | 2.2 | 2.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Analysis
Several CME covered call investment strategy positions were found with potential returns ranging from 2.2% to 4.7% (32 days) with downside protection ranging from 3.8% to 7.1%.
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 2.2% (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. Several of the CME 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 first CME 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 a free 14-day trial of its service. So join PowerOptions today, and you too can start reaping the benefits of the covered call investment strategy.
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, futures, interest rates, derivatives, commodities[/tags]