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The focus of this article is to discuss two low risk options plays revolving around Paychex. The article will contain the anatomy of the trade and what an investor can reasonable expect.

Overview

Paychex (NASDAQ:PAYX) is a payroll processing company headquartered in New York. The company has a solid balance sheet as evidenced by the absence of debt and pays a 4.1% dividend (32 cents a share). PAYX has consistently paid quarterly dividend for more than ten years and competes in a stable predictable industry.

Chart courtesy of Seeking Alpha

Trade

The trade I would like to focus on is the Jan 2013 30 call. The call is currently trading at $3 and is $1.60 in the money. To enter into the trade the investor would have to purchase the stock first and sell a corresponding amount of options against the position. The trade works as follows: 100 shares purchased at $31.6 and 1 (30) strike call is sold against the position.

The investor would receive $3 per share for the contract and if held to maturity the contract would be exercised at the end of business January 19 2013. At this point assuming the stock stays above $30 the shares will be sold to satisfy the contract and the proceeds will be deposited into your account. In the interim you will also collect a quarterly dividend of 32 cents per share.

The investor would be paid $3 at the time the contract is sold and an additional 96 cents over the life of the contract. This works out to $2.4 total collected which is an 8% gain for an 11 month holding period. The trade offers the investor downside protection to $26.04 which would be in my opinion an excellent price to hold PAYX. I view this as a relatively conservative approach to generating a satisfactory return with limited risk.

Symbol

Last

Change

Bid

Ask

High

Low

Volume

Chart

PAYX

31.60

+0.42

31.60

31.71

31.82

31.30

2,244,500

PAYX Expiration Months: Feb12 | Mar12 | Jun12 | Sep12 | Jan13 | Jan14

Calls

Disable Roll OversStreaming

Strike

Last

Chg

Bid

Ask

Day High

Day Low

Vol

OpInt

Action

January 2013

(337 days to expiration)

15.00

0

0

14.60

18.10

0

0

00

0

Trade | Watch | Calc | Detail

17.50

14.50

0

12.40

15.50

0

0

00

5

Trade | Watch | Calc | Detail

20.00

11.80

-0.60

11.60

11.80

11.80

11.80

07

21

Trade | Watch | Calc | Detail

23.00

5.70

0

8.40

9.10

0

0

00

7

Trade | Watch | Calc | Detail

25.00

6.60

0

6.90

7.10

0

0

00

925

Trade | Watch | Calc | Detail

30.00

3.16

+0.36

3.00

3.20

3.16

3.16

07

2,433

Trade | Watch | Calc | Detail

35.00

0.84

+0.14

0.80

0.90

0.84

0.84

07

4,047

Trade | Watch | Calc | Detail

40.00

0.15

0

0.10

0.15

0

0

00

1,985

Trade | Watch | Calc | Detail

45.00

0

0

0

0.05

0

0

00

0

Trade | Watch | Calc | Detail

Option chain courtesy of Options Xpress

For the more aggressive trader the same strategy can be applied but at a higher strike price. The Jan 2013 35 call is currently trading at 80 cents. Using the same time frame as above the investor would generate an additional 96 cents in dividends for a total of $1.76 cents.

The difference in the two trades is the strike price. At the 35 strike the stock has to appreciate from the current level. Assuming it does, $1.76 is collected plus $3.4 capital gains (35-31.6 purchase price). The trade would generate a very acceptable 13.79% gain. Some downside protection would be lost since the strike price is out of the money. In this example the downside protection would be $29.89 (premium plus dividends).

In summary each trade in my opinion offers an acceptable return with some downside protection. I anticipate selling the 35 call in the next few trading days. Thank you for reading and I would appreciate any feedback.

Source: Paychex: Generating An Acceptable Return Via Options

Additional disclosure: I intend to sell the 35 calls against my position in the next few trading days.