Monday, April 11, 2011

Covered Calls on One Lot of Bunge

With Bunge over $73 today, May $75 calls were sold against one lot for $1.70/share after commissions.

With earnings season starting, (FYI - BG earnings 4/28) it seemed appropriate to put some hedge on this trade. A few scenario's

Up and away - Hopefully BG breaks out past $75 in the next few weeks. In that case this lot would get called away at essentially $76.7o. This would cap the gain on this lot at around 12%, and the other lot in the portfolio will have a good gain and momentum.

Down - Of course, my bullish opinion of this stock could be wrong (hard to believe I One concern is that the current chart could be viewed as starting to show a "double-top" just under $75. If the stock does fall, the premium from this option would hedge the downside by about 2% on the lot or 1% on the full trade. That hedge seems appropriate to me, and was the key catalyst for selling these calls.

Sideways - It is possible the next few weeks could be uneventful, and BG keeps trading in the low $70s. In this case, a decrease in volatility (IV around 27 at the time of the trade) that usually comes after the earnings catalyst passes, and time decay would likely allow these calls to be covered for a 1+% profit.

Stay tuned.

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