A protected covered call or collar search performed using PowerOptions tools, seeking to find the highest returning position for companies with a maximum potential loss of 8% and a stock price in an uptrend, produced network storage company NetApp (NTAP) as shown below:
Click to enlarge.
On the coattails of NetApp were children's apparel retailer Children's Place Retail Stores (PLCE) discussed in this article, beauty related products company Avon Products (AVP), biotechnology company Dendreon (DNDN), Latin American online commerce company Mercadolibre (MELI) and digital video recorder company TiVo (TIVO) discussed in this article.
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 put option for protection or "insurance." The NetApp protected covered call position in the table above has a potential return of 4% (47% annualized) and a maximum potential loss of 7.9%, so even if the price of the stock goes to zero, the maximum loss that can be sustained is 7.9%.
The highest returning positions as shown above were found by selecting to search and sort via the highest returning positions. Stock price for companies in an uptrend were included by seeking to search for companies with a 100-day moving average stock price 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 easily using option income generating investment methods.
NetApp markets designs, develops and markets network storage solutions. NetApp products provide their customers with flexible and efficient storage of information. Applications for the company's products include Internet, media, gaming, financial and government.
In NetApp's Q3 2012 earnings call held on February 15, 2012, the company indicated that all sectors performed well, except for the U.S. public sector. The company noted that a slowdown between Q2 and Q3 is typically the case for the U.S. public sector, however, in this case the slowdown was worse than expected due to the defense and intelligence sectors. The company experienced issues with hard drive supply due to the flooding in Thailand and expects the hard drive supply issue to continue for a few more quarters. NetApp also noted that the company has gone from #4 in market share to #2 in market share over the course of the last two years. The company indicated that flash memory is increasingly being used in the company's products and the biggest impact so far has been with respect to use of Flash as a cache.
After peaking around $60 in February of 2011 and then falling to the $35 range in August of 2011, the price of the stock has been stuck in a trading range between $35 and $45 for the last nine months as shown below:
The current price of the stock is near its previous support level and appears to be basing at the $35 level and may potentially be setting up for a leg-up in price.
NetApp's next earnings call is scheduled to be held on Wednesday, May 23, 2012 which is one reason the return for the company's protected covered call is elevated. The implied volatility of a company often increases near an upcoming earnings release. With the troubles in Europe, a current investor in NetApp or an investor seeking to take advantage of the company's elevated implied volatility might enter the protected covered call listed in the table above in order to position for generating a potential profit while remaining protected from a significant drop in the price of the stock.
The specific call option to sell is the 2012 Jun 35 at $2.70 and the put option to purchase is the 2012 Jun 31 at $0.83. A profit/loss graph for one contract of the NetApp protected covered call is shown below:
For a stock price below the $31 strike price of the put option, the value of the protected covered remains unchanged (at expiration). And, if the price of the stock increases to around $40, the protected call 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.