Thursday, January 19, 2012

HPQ - Covered Calls

HPQ traded over $27 today.     Frequent readers will recall that  CCI believes that HPQ will stall out in the upper $20s for awhile longer.   Option volatility has been steadily falling making selling premium less profitable, but today CCI sold a lot of Feb $28 calls for  $.40 after commissions.  In the most basic scenarios:
  • The stock trades over $28 a month from now and a lot will be called away at an effective price of $28.40.  A level at which I'm comfortable selling
  • The stock will stall or fall and CCI will keep the 1.4% premium to try to ease the pain of the loss we are sitting on in this stock.
More likely, the stock will bounce around over the next month and these options can be profitably traded in the shorter term.

Rationale for doing this today is that I'd expect HPQ to trade tomorrow "in sympathy" with IBM as it reports earnings tonight.  i.e.  If IBM trades up: HPQ will trade up, and if IBM trades down: HPQ will trade down.    However, while HPQ certainly has similarities with IBM it is not the same as IBM.  It has a different valuation, a different status of its management team, a larger focus on pcs and consumer, is earlier in the integration of services, etc.  With these type of differences, I'm not sure trading in sympathy with IBM is necessarily "correct".  Hence if HPQ trades up on IBM results I'd suggest it is getting overvalued, and deserves to be sold.  If HPQ trades down with IBM results, I'd suggest it is getting unduly punished.   The covered call capitalizes on this type of situation.

No comments:

Post a Comment