Examining The NTRI Covered Call Opportunity For Long-Term Shareholders

I initiated my NutriSystems, Inc (NTRI) covered call strategy on July 24th, 2007, before the company announced Q2 2007 earnings. This post is post 2 of 3 regarding this trade. Part 1 described the setup of this short-term opportunity for existing long-term shareholders of NTRI.

The earnings release was not well accepted by the Street, setting up a potential 670 incremental basis point gain* for the long-term shareholder.

After the bell on 7.24.07, NTRI announced its earnings for Q2 2007.

Please note this strategy was highlighted for the long-term shareholders of NTRI, a group I am not a part of because of my value selection criteria.

Paper Trade Details:

Long-term shareholder currently owning 500 shares valued at $31,890 ($63.78/share) at the close of 7.24.07

Sell 5 August 07 call options with a 65 strike price for $2,125 ($4.25/share as of 7.24.07)

$2,125 represents a 6.7% gain.*

Why did I choose the 65 November calls?
In the research that I published during my first post, I am using the 18-day % gain/(loss) from the last three reported quarters of an expected stock price gain of 1.3%. This results in a potential share price of $64.64 (1.3% above 63.78) at the date of option expiration on August 17th. I then take the next highest strike price of $65 to determine which strike price to sell, because I am trying to avoid the option be exercised. This trade does run the risk if the shares trade at the 18-day max levels, but most options buyers will wait to the last couple days to expiration to execute.

On August 17th, I will post the final part of this trilogy when the final results are in…

* Does not includes fees and taxes

Disclosure: Author does not own any securities, NTRI equity or options, mentioned in this article.