This strategy not only provides you with the opportunity to leverage your position in Exelon Corporation (EXC), but it also provides one with the chance to get into the stock at a much lower price. This technique should only be employed if you are bullish on the stock. If you are not bullish on the long-term prospects of this stock, then, please do not put this strategy to use.
Suggested strategy for Exelon Corporation :
The stock has been trying to break out past $39-$40 since Feb of this year. It put in a double bottom formation in June and the current pattern is indicating that it has a good chance of breaking out. A weekly close above should do the trick. A weekly close above 40 will also turn the outlook to bullish in the intermediate time frames (1-3 months).
This play has two parts to it. The first part entails selling a put and in the second part calls are purchased with the proceeds from part 1.
Part 1
The Jan 2013, 38 puts are trading in the $1.65-$1.75 ranges. Put in orders to sell this contract for $1.70 or better. For each contract sold $170 will be deposited into your account.
Part 2
The proceeds from step one will be used to fund the purchase of the calls in step 2. The Jan 2013, 42 calls are trading in the $03.0-$0.40 ranges. If you put in orders to purchase these options for $0.35 or better you will be able purchase 4 calls and still have a net credit of $30.
Benefits of this strategy
You have an opportunity to significantly leverage your position in this stock for almost free. Hardly anyone is fully invested in the markets all the time and so the money sitting in your account is dead money. As this money is not being used, one could argue that the money being used to secure the puts is not a real cost as it was not being used anyway. If you are bullish on the stock this would be a good way to significantly boost your rate of return for little to no cost. If the other hand you were going to use this money on another play and decided instead to put it use here, then it would make sense to count the money that is used to secure the puts as part of your cost. With this strategy, you have the ability to control 400 shares for each put you sell.
If the stock trades below the strike price you sold the puts at, the shares could be assigned to your account. Depending on the number of calls you purchased you cost per share could range from $36.60 (if you purchased one call only) to $37. 70(if you purchased 4 calls).
Risk factors
If you put this strategy to use just because you were enticed with the gains, then you could be taking on quite a bit of risk, as the stock could trade well below the strike price and the shares could be put to your account.
If, on the other hand, you were bullish on this stock and were ready to purchase it, then this strategy provides you with a way to get into the stock at a lower price and also provides you with the option of significantly leveraging your position. If the stock takes off, you could walk away with some pretty decent gains. The leverage part of this trade is free as you are paying for it with the proceeds from the sale of the puts.
Company: Exelon Corp
Basic overview
- Relative Strength 52 weeks = 55
- Cash Flow 5 -year Average = 7.72
- Quarterly revenue growth = -5.40%
- Quarterly earnings growth = - 70%
- Profit margins = 10.87%
- 5 year sales growth rate = 1.6%
- EPS 5 year growth rate = -3.5%
- 5 year capital spending rate = 15.5%
- Long term debt to equity ratio = 0.80
Growth
- Net Income ($mil) 12/2011 = 2495
- Net Income ($mil) 12/2010 = 2563
- Net Income ($mil) 12/2009 = 2707
- EBITDA ($mil) 12/2011 = 6982
- EBITDA ($mil) 12/2010 = 7981
- EBITDA ($mil) 12/2009 = 7751
- Cash Flow ($/share) 12/2011 = 7.64
- Cash Flow ($/share) 12/2010 = 8.42
- Cash Flow ($/share) 12/2009 = 8.07
- Sales ($mil) 12/2011 = 19184
- Sales ($mil) 12/2010 = 18644
- Sales ($mil) 12/2009 = 17318
- Annual EPS before NRI 12/2007 = 4.31
- Annual EPS before NRI 12/2008 = 4.17
- Annual EPS before NRI 12/2009 = 4.12
- Annual EPS before NRI 12/2010 = 3.95
- Annual EPS before NRI 12/2011 = 4.16
Dividend history
- Dividend Yield = 3.90
- Dividend Yield 5 Year Average = 4.00
- Dividend 5 year Growth = 4.96
Dividend sustainability
- Payout Ratio = 0.74
- Payout Ratio 5 Year Average = 0.49
Performance
- ROE 5 Year Average = 23.37
- Current Ratio = 1.30
- Current Ratio 5 Year Average = 1.2
- Quick Ratio = 0.60
- Cash Ratio = 0.4
- Interest Coverage = 82.9
Conclusion
Only investors who are bullish on this stock should put this strategy into play, as there is a chance that the shares could be assigned to your account if the stock trades below the strike price. Consider taking profits if the calls show gains in the 75%-100% ranges. You would do this by selling the calls and buying back the puts. Investors looking for other ideas might find this article to be of interest Procter & Gamble: More Than Double Your Current Yield or an entry of $59.30..
Disclaimer
It is imperative that you do your due diligence and then determine if the above strategy meets with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware
Additional disclosure: EPS and Price Vs industry charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com. Options tables sourced from yahoofinance.com. Earnings and growth data sourced from dailyfiance.com
