Covered call: HD & JGL HY

August 18th, 2009 · 1 Comment

After doing some research last night, I identified three short-term covered calls to track briefly this morning.  I ended up pulling the trigger on a trade involving Home Depot (HD) and the Aug 2009 $27.50 strike call option (JGL HY).  Here’s my analysis.

While we have the tools, we needed the materials

While we have the tools, we needed the materials

I ended up looking at Home Depot because of a noticeable change in my own personal experiences with a couple of local stores.  My wife and I have been doing a sweat-equity bathroom remodel on and off since last November.  During that time, we’ve made frequent trips to both Home Depot and Lowes stores and I’ve noticed the following trends.  First, the folks at HD are friendlier and MUCH more knowledgeable than they were just 9 months ago — we haven’t been able to enter the place without being asked if we need help with anything, and in all but one case, the advice we got was very useful.  Second, HD stores seem packed, both in comparison to what I remember from 9 months ago, but especially when compared to the number of people at Lowes when we’ve had to go there because HD was out of something.  In short, I’m gaining confidence in HD taking share away from Lowes, and thus in a growth in stock price.

As a second step, I looked at both short term, medium term, and longer term options premiums.   Since I was looking to sell an OTM short-term call, I wanted to capture at least some premium for this week, plus there is a good chance I’d be holding the underlying after this Friday’s expiration.  So what I was looking for in the mid and long term was what sort of IV (implied volatility) there is and whether I was setting myself up to receive good premiums on future sold calls.  Yes, the volatility is there for a reason, but again I’m feeling HD’s direction is up from my own personal experience with the stores, so I’m just a bit more comfortable holding HD when compared to other possible trades I looked at.

Anyway, here’s the details of the trade I actually completed this morning.  As usual, in the following I’ve already added or subtracted commission costs as appropriate; which is why the numbers go out to 4 decimal places.

Critical dates
2009.08.18: Initial position: BTO 100 HD @ $27.1795 (including commissions)
2009.08.18: Initial call option: STO 1 JGL HY (Aug09 $27.50) @ $0.1839 (after commissions)

Summary, if not called.
Days position held: 4
Capital investment: $2717.95
Income received: $18.39
Percent return: 0.68%
Annualized yield: 85.03%

Summary, if called.
Days position held: 4
Capital investment: $2717.95
Income received: $45.49
Percent return: 1.67%
Annualized yield: 354.76%

Tags: Trades

1 response so far ↓

  1. 1 davmp // 2009.08.18 at 1:44 pm

    Kimberly noticed the following news story regarding market share growth from an interview with Home Depot’s CFO

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