A collar or protected covered call search performed using our tools seeking to find the highest returning position with a maximum potential loss of 8% for profitable value companies with a stock price in an uptrend produced the computer storage company Western Digital (NYSE:WDC) at the top of the list as shown below:
Following closely behind Western Digital were insurance company American International Group (NYSE:AIG), engineering and construction contractor Foster Wheeler (FWLT), managed care services company Wellcare Health Plans (NYSE:WCG) and machinery company Terex (NYSE:TEX).
A protected covered call is an income generating option strategy where a call option is sold against a stock with some of the proceeds from selling the call option used to purchase a protective put option. The 8% maximum loss parameter was selected for the search, as a loss of 8% or less can often be recovered fairly quickly using option income generating strategies. A search parameter for Price-to-Sales (P/S) of less than one was used to include value companies in the search. Profitable companies were included in the search by selecting the Price-to-Earnings (P/E) parameter greater than zero. Companies with a stock price in an uptrend were found by searching for stocks having a 100 day moving average greater than the 200 day moving average.
In a previous article related to Western Digital, a protected covered call was considered, similar to the one mentioned in this article, which involved selling a 2012 Apr 41 call option, and purchasing a 2012 Apr 37 put option. At option expiration in April of 2012, the price of Western Digital's stock closed at $41.44 and was above the $41 strike price of the call option, so the Western Digital stock would have been assigned or called away. A graph of Western Digital's stock price is shown below:
A long position in Western Digital's stock over the same time period as considered for the protected covered call of the previous article would have returned a very small profit of $0.02 (before brokerage fees/commissions). On the other hand, the protected covered call noted in the previous article would have returned 2.8% (44.4% annualized). The protected covered call from the previous article was also protected from a large loss for a stock price below the $37 strike price of the put option.
Western Digital has not been in the news very much of late, and there wasn't any earth shattering news revealed in the company's Q3 2012 earnings call held on April 26, 2012. As a result, the outlook for the company remains neutral to bullish which is conducive for a protected covered call.
The new protected covered call position shown in the table above has a potential return of 3.3% (30% annualized) and a maximum potential loss of 7.5%. The maximum loss for the new protected covered call position has a maximum potential loss of 7.5% (at expiration), even if the price of the stock drops to zero. The specific call option to sell is the 2012 Jun 38 at $2.26 and the put option to purchase is the 2012 Jun34 at $0.56. A profit/loss graph for one contact of the protected covered call is shown below:
For a stock price below the $34 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 $45, the position can 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.