Over the past year I have written on how to remain bullish on a stock yet continue to make money on it. I have used this strategy multiple times, and been very successful at it generating income while holding the stock. In many cases this has generated me a small return (1-4%) but on a monthly basis not annually.
This strategy has worked with the likes of Dell (DELL), Netflix (NFLX) and even the monster Apple (AAPL). Today however I am focusing on 2 struggling stocks, primarily Sirius (SIRI), but also on another I have noticed future potential in: Zynga (ZNGA).
Over this year to date, Sirius has had its ups and downs, beginning the year in the $1.85 area, climbing as high as $2.40 in April, and has come back down to the $2.15-$2.20 area following a nice 6% gain in the last week or so. There is some talk of Sirius making a run (again) as earnings approach next week.
Let's assume you hold a position with 10,000 shares of Sirius at a cost basis of $2 a share. If you wrote 100 contracts against your share position, specifically targeting the Dec. $2.50 calls at $0.10 per share, you would pocket $1,000 (less fess) as a premium. If the shares are called off (meaning the price is at or above $2.50 on 12/21) you keep the $1,000 and make a 25% additional return on your investment. A $20K initial investment will net you $26,000 or about a 30% total return.
If the calls expire worthless you get a 5% ROI for simply holding your shares (which you would have done anyhow). You can also hedge by simultaneously purchasing Jan 13 $3 calls for only $0.05 a share (1/2 the price of your covered call). If the stock runs up rapidly, you get your 30% return AND you get an increase in the value of your Jan 13 calls that you can sell or exercise.
The same strategy can be used for Zynga, except I am looking at this stock a bit differently. I am of the belief that someone will attempt to acquire them sometime in the next 3-6 months. I wrote this weekend that Facebook (FB) would be the prime candidate to do so, although there are other potential buyers as well. So here is how I personally played this one.
I entered into a position for Zynga on Monday at the cost of $3.06 per share. I immediately wrote Dec. 12 $3.50 covered calls against my position for a $0.44 per share premium (meaning I have already made back about 14% on my initial investment). I also purchased March 13 $5 calls (same share amount) for $0.32 a share. If the stock fails to reach $3.50 by Dec. 22 I pocket the premium. If it does, I keep the premium and also make 15% ROI in less than 5 months AND my $5 calls increase in value as well. My hope here (in a gamblers world) would be to hit a middle. The stock fails to hit $3.50 by Dec. 22, then runs up between Dec. 22 and March 16, making my $5 calls worth more than today. I then can sell the shares at a profit, or write more covered calls against the shares I own between December and March. In a perfect word, I am hoping the takeover happens and a tender offer is announced right after Christmas.
In either case, I am making money on shares I hold as long as the price does not radically decrease. That is why this strategy is only for those bullish on a certain stock. Sirius has been a great stock to use this strategy on because it has yo-yoed back and forth all year long. Remember, just because the company you purchase does not offer you a dividend, does not mean you cannot generate money while holding (and remaining bullish) on your investment!