On Friday Microsoft (MSFT) reached a deal with the Novell Corp. (NOVL) that makes it easier for consumers to use both Microsoft and Linux products. This puts pressure on Red Hat Inc. (RHAT), a company selling Linux related products, and whose shares fell recently after Oracle Inc. (ORCL) announced they would be providing technical support for Linux.
Microsoft considers the Linux software to play an important role as a server operating system to many of Microsoft’s business clients and considers the alliance with Novell important for their business going forward.
So how can this information be used to as an investment strategy? To many analysts the new relationship is important, as the new Microsoft and Novell alliance mitigates the threat of litigation by Microsoft against Linux and its users. The Microsoft/Novell alliance sent Novell stock up 16% on Friday. In many analysts opinion, Microsoft and Novell may continue to climb higher in the coming months. The flip side to this coin is the likelihood Red Hat’s stock may decrease in the coming months.
This new Microsoft / Novell agreement is a competitive threat to Red Hat’s current market base. With the new Microsoft/Novell agreement, Novell’s products may become more attractive to consumers and Red Hat’s products may become less competitive ( zdnet.com ).
This is where we turn to the PowerOptions’ StrategySearch Summary Tool for answers. This is an exciting tool that can help you exploit the best option trade available once you have decided on an investment strategy.
First we took a look at Microsoft and Novell covered calls for the month of December (there is a great covered call example on the PowerOptions website). Unfortunately, the covered call strategy for Novell and Microsoft yielded few profitable results. This is probably because there are few market inefficiencies relating to these two companies.
Next we took a look at covered puts for Red Hat. This yielded several more exciting trades. The table below shows the results of the search:
| Covered Puts RED HAT INC (RHAT) $16.67 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sell Option |
Strike Price |
Bid Price |
Downside Protection |
%return Assigned |
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| RCVXC | 06 DEC $15.00 | $0.40 | 2.40% | 12.70% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| RCVXW | 06 DEC $17.50 | $1.50 | 9.00% | 4.40% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The first trade for a $15 December covered put option, shows significant profit if assigned. However, the stock price would have to drop below $15 for this to come to pass. The second covered put position involving the $17.50 December put is much more attractive, offering a 9% downside protection and a respectable 4.4% potential profit.
Investors planning to execute the covered put strategy should be aware the potential loss is unlimited and requires shorting of the stock in addition to selling the put option.
There’s a lot of chatter on the Internet right now, regarding the Microsoft and Novell deal. Most of the chatter when mentioning Red Hat seems to suggest Red Hat’s stock will decline.
Join PowerOptions today, and you too can start reaping the benefits of the covered put 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 put investment strategy for their personal portfolios, PowerOptions provides an Internet based search engine for finding potentially lucrative income producing covered put options positions.
PowerOptions’ sister company PowerOptionsApplied provides expert stock option trading recommendations. PowerOptionsApplied specializes in covered call, naked put and iron condor stock options strategy recommendations. PowerOptionsApplied provides a 30-day risk free trial of its service.
[tags]covered call example, covered put strategy, investment strategy, iron condor, option income, poweroptions, stock option trading, stock options, Microsoft, Red Hat, Oracle, Novell, MSFT, RHAT, ORCL, NOVL[/tags]