Omnivision Technologies: Highest Returning Protected Covered Call

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 semiconductor image-sensor company OmniVision Technologies (NASDAQ:OVTI) as shown below:

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On the heels of OmniVision were digital video recorder company TiVo (NASDAQ:TIVO) discussed previously, networking company Juniper Networks (NYSE:JNPR), weight management and nutrition company Herbalife (NYSE:HLF) and wide area networking company Riverbed Technologies (NASDAQ:RVBD).

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 OmniVision protected covered call has a potential return of 4.4% (43% annualized) and a maximum potential loss of 7.9%.

For the search, stock prices near the lower Bollinger band were included, as this includes stock which have had a pullback in price and are potentially basing for the next leg up in price. The highest returning positions as shown above were found by sorting by the highest returning positions. Profitable companies were included by searching for companies with a Price-to-Earnings ratio (P/E) greater than zero. Stock price for companies in an uptrend were searched for 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 many times be recovered fairly quickly using option income generating investment methods.

OmniVision Technologies designs, develops and markets a wide arrange of image sensing semiconductor devices. Applications for the company's devices include automotive, digital camera, video camera, entertainment, medical, mobile, notebook, webcams and security/surveillance.

OmniVision recently acquired (pdf) the wafer-level lens production and assembly capability of VisEra, OmniVision's joint venture with Taiwan Semiconductor Manufacturing Company (NYSE:TSM). The company claims the acquisition will enable further streamlining of the production process, consolidate the supply chain, expand production capacity and reduce costs.

In the company's Q3 2012 earnings call held on February 23, 2012, the company indicated it is planning on maximizing the utilization of its 8-inch wafer capacity via OmniBSI+. The company's OmniBSI technology turns the image sensor upside down as compared to conventional technologies and applies the color filter and micro lenses to the backside of the pixels such that light is collected through the backside of the sensor. Reversing the arrangement of the layers provides the most direct path for light to travel into the pixel, which provides low-light sensitivity.

Apparently OmniVision's camera components were not included in Apple's (NASDAQ:AAPL) iPhone 4S smartphone and the company was displaced by Sony (NYSE:SNE). And as a result of the displacement, the company's stock price has taken a hit over the last several months as shown below:

OmniVision's upcoming earnings call scheduled for May 31, 2012 is probably contributing to the company's protected covered call popping up as the highest potential returning position as shown above, as the implied volatility of a stock often increases near a company's quarterly earnings release. An investor in OmniVision might consider entering the protected covered call shown in the table above in order to be in position to generate a potential return, yet be protected in case the company releases bad news.

For the OmniVision protected covered call, the call option to sell is the 2012 Jun 17 at $1.45 and the put option to purchase is the 2012 Jun 15 at $0.70. A profit/loss graph for one contract of the protected covered call is shown below:

For a stock price below the $15 put option strike price, the value of the protected call remains unchanged (at expiration), even if the price of the stock goes to zero. If the price of the stock increases to around $20, 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.