Monday, September 17, 2012

Covered Calls on Corning (GLW)

Readers will recall that CCI has sold puts on Corning (GLW)  many times in the past.  The main rational for this trade has been GLW's $14 book value, single digit p/e, and technology core competencies.

Frankly, CCI has done this so many times that I've lost count.  Usually the puts have expired  or a small profit from option premiums have been taken.  However, the July $13 puts ended up being assigned.  A scenario for which  a put seller always needs to be prepared.  With the credit for this put sale the stock was acquired at an effective price of $12.51 at July expiration. 

With GLW trading back over $13, CCI now switched the strategy and sold the $13 Oct calls against this position for $.40.   Three scenarios
  • The stock falls back well  below $13 fairly soon  - Oops, not good, but CCI will harvest a great deal of the option premium and re-evaluate next steps.
  • The stock will hover just below $13 - The option will be held until October and expire. The effective cost basis for the holding will be down to $12.11, and CCI will likely look for opportunities to sell calls again.
  • The stock will stay above $13 through October - The stock will be called away.  CCI will take the 7+% over three months gain ($13.40 - 12.51) and redeploy the capital.

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