Stumped trying to decide what the perfect gift to get for Mom on Mother’s Day? How about an investment in on of her favorite companies? Better yet, how about the “best” protected covered call or collar investment in one of her favorite companies? A protected covered call can be entered by selling a call option against the stock and using some of the proceeds from selling the call option to purchase a protective put option.
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The “best” protected covered call investment is subject to argument, but an investor using PowerOptions can choose to decide what they consider to be the “best” parameters describing a protected investment and then search from a selected number of companies in order to find the “best” protected investment.
For the sake of argument, say some of Mom’s favorite companies are domestic retailer Bed Bath & Beyond (BBBY), book retailer Barnes and Noble (BKS), chocolate candy company Hershey (HSY), jewelry company Tiffany (TIF), lotion and lingerie company Limited Brands (LTD) and department store Macy’s (M).
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Using PowerOptions a custom list of the companies mentioned above can be created by selecting to Create/Modify Lists as shown below:
Then selecting Create List as shown below:
Giving the list a name, a description and a list of ticker symbols and selecting “Create” as shown below:
Then when searching for a collar or protected covered call the Mothers Day list can be used for the search as shown below:
Now to select some of the search parameters for Mom. Mom is probably pretty risk averse, so we’ll select the %Max Risk parameter to 8% as shown below:
Using a percent maximum loss of less than 8% is fairly conservative, as a loss of less than 8% can typically be recovered fairly quickly using option income generating methods.
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Mom will probably want to search for companies which have been doing fairly well over the last few months, so we’ll select to search for a 100 day moving average greater than the 200 day moving average as shown below:
Selecting to search for companies with a 100 day moving average greater than the 200 day moving average includes companies with a stock price in an uptrend.
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To find the best returning protected covered call, we’ll select to sort by percent if unchanged and select to sort from highest to lowest as shown below:
To execute the search, we’ll select the “Submit These Settings” button as shown below:
The search results will be presented for viewing as shown below:
Looks like the winner is Macy’s with a potential return of 2.4% (23% annualized) and a maximum potential loss of 5.7%. So even if the price of Macy’s stock goes to zero, the maximum potential loss is 5.7% (at expiration). The specific call option to sell is the 2012 Jun 38 at $1.53 and the put option to purchase is the 2012 Jun 35 at $0.61. A profit/loss graph for one contract of the Macy’s protected covered call is shown below:
For a stock price less then the $35 strike price of the put option, the value of the protected covered call remains unchanged. And, if the price of the stock increases to around $43, the position can most likely be rolled in order to realize additional potential return.
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Don’t forget to save the search script (shown below), that way you can run the search for the “best” protected covered call again next year on Mother’s Day.
Mother’s deserve only the “best”, and using PowerOptions the “best” investment for dear old Mom can easily be found.
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