A protected covered call or collar search performed using PowerOptions tools, seeking to find the highest returning position for profitable companies with a maximum potential loss of 8% and a stock price in an uptrend, produced Cybersecurity company Sourcefire (FIRE) as shown below:
Following on the heels of Sourcefire were memory storage company Fusion-io (FIO), online travel company Priceline.com (PCLN), i-everything company Apple (AAPL) and network security company Fortinet (FTNT).
A protected covered call may be entered by selling a call option against a purchased or existing stock and using some of the proceeds from selling the call option to purchase a protective put option. The Sourcefire protected covered call has a potential return of 4.1% (46.8% annualized) and a maximum potential loss of 6.3%, even if the price of Sourcefire's stock goes to zero.
The highest returning positions as shown above were found by selecting to sort by the highest returning positions. Profitable companies were found by selecting to search for companies with a Price-to-Earnings ratio (P/E) greater than zero. Stock price for companies in an up trend were found by selecting to include companies with a 100-day moving average greater than the 200-day moving average. The 8% maximum loss parameter was selected, as a loss of 8% or less can typically be recovered fairly quickly using income generating investment methods.
Sourcefire offers a variety of products based upon its customers needs. Sourcefire offers physical solutions on appliance, virtual solutions and cloud-based solutions. Sourcefire's founder and CTO, Martin Roesch, developed Snort® in 1998 for intrusion detection. Snort is the most widely deployed intrusion detection and prevention technology in the world. Where Snort leaves off Sourcefire's other products take over by offering advanced security products and services. Sourcefire Next-Generation IPS (NGIPS) offers real-time network and user awareness for increased security visibility. Sourcefire Next-Generation Firewall (NGFW) provides advanced firewall functionality. FireAMP(TM) provides advanced malware analysis and protection.
In Sourcefire's previous Q4 2011 earnings conference call, the company reported quarterly revenue of $53.2 million, which was a 40% increase over the fourth quarter of 2010 and reported a yearly revenue increase of 27%. Additionally, the company indicated that some product sales included hardware as well as software. On a potentially troubling note, the company indicated that 2012 Federal Government revenue is expected to increase modestly over 2011.
After reporting stellar results for Q4 of 2011, Sourcefire's stock price went ballistic as shown below:
Sourcefire's next earnings release is scheduled for April 30, 2012 - which is probably part of the reason for the high potential return for the protected covered call as shown in the table above. The company has a very expensive P/E of 221 and any bad news released on April 30 could cause the company's stock price to plummet. Although, it is not anticipated the company will release bad news, sometimes is wise to protect an investment anyway.
The protected covered call enables a current investor to protect a profit in Sourcefire's stock and enables a new investor with the potential to realize a very nice return, while also protecting the position from bad news. The specific call option to sell is the 2012 May 50 at $4.00 and the put option to purchase is the 2012 May 45 at $1.95. A profit/loss graph for one contract of the protective covered call is shown below:
For a stock price less than the $45 strike price of the put option, the value of the protected covered call remains unchanged (at expiration). If the price of the stock increases to around $55, the protected covered call most likely be rolled in order to realize additional potential return.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.