Prudential Looks Like a Buy and Promising Covered Call

Prudential Financial (PRU) is being recommended by Barron's, Morningstar.com and securities analysts as a good buy. The stock closed Friday at $73.71 a share. Barron's quotes analysts who think it will reach $90 to $108, and Morningstar estimates its fair value is $91. It suggests buying the stock under $59 and considering selling if it tops $136.50.

PRU's bullish price objective on a point and figure chart is $88. The stock's annual dividend yields 1.56%, and the company routinely buys back shares, which reduces the supply of the stock. But as The Wall Street Journal pointed out last week, stock buy backs often prove to be poor investments. More income-oriented traders might want to consider writing covered calls against the shares that they buy. PRU October 75 calls are yielding 38% annualized returns while PRU October 70 calls are yielding 30.5% annualized.

Another way to trade PRU is to buy January 80 calls, or LEAPS. With the historical volatility of PRU at 75% and implied volatility at 43.6%, the options look cheap. But both the historical and implied volatilities are high compared with where they've been over the last 12 months, which means they are a bit rich. This means that even if the stock rises, the options price could fall if volatility declines. PRU Jan 2010 $80 calls closed Friday at $10.70 per share, or 14.5% of the $73.71 per share price of the underlying stock. That looks pretty good to me. Daily charts for PRU and its peers, AIG, HIG and MET are here. Click on any chart to get charts like these PRU charts.

Disclosure: I don't own PRU.

 

Comments

[Tick Talk:]

Good stuff bro. I'm partial to this sector for covered calls and diagonals as well. The price on AIG gives the best bang for the buck IMO.

2008 Sep 03 12:27 PM