1/17/13 Trade Alert: Four January Trades

Please Note: These FOUR recommended trades only apply to those Personal Finance Income Plus members who already have positions in the mentioned stocks and covered calls. Do NOT do these trades as initial positions.

1. Horizontal Spread Roll of Discover Financial Services (NYSE: DFS) to April

  • “Buy to Close” January $40 Call

and

  • “Sell to Open” April $40 Call


Option Symbols: DFS130119C40 and DFS130420C40

Limit Order Price: Net credit of $1.45 or more ($145 per spread)


If your broker doesn’t allow option spreads, then you’ll have to do two separate single-option trades:

(a) “Buy to close” January $40 call for a debit of $0.05 or less ($5 per contract)


(b) “Sell to open” April $40 call for a credit of $1.50 or more ($150 per contract)


Directional View for Underlying Stock: Neutral


Personal Finance Portfolio: Growth

  •    Tell your broker:
  • For a horizontal spread (preferred):

I’d like to enter an option spread order on Discover Financial Services (DFS) stock. Specifically, I want to buy to close the January $40 call and sell to open the April $40 call for a net credit of $1.45 per share or more.

  • For a two-part trade:
I’d like to buy to close the January $40 call on Discover Financial Services (DFS) stock for a debit of $0.05 per share or less.

I’d like to sell to open the April $40 call on Discover Financial Services (DFS) stock for a credit of $1.50 per share or more.

Please note: The important thing is to achieve a net credit on the roll (i.e., both trades) of $1.45 or more. The specific limit prices of the individual “buy to close” and “sell to open” trades are just starting points and should be adjusted as needed, keeping the net credit of the overall roll in mind.

 

2. Diagonal Spread Roll of Verizon (NYSE: VZ) to April

  • “Buy to Close” January $45 Call

and

  • “Sell to Open” April $42 Call


Option Symbols: VZ130119C45 and VZ130420C42

Limit Order Price: Net credit of $1.13 or more ($113 per spread)


If your broker doesn’t allow option spreads, then you’ll have to do two separate single-option trades:

(a) “Buy to close” January $45 call for a debit of $0.02 or less ($2 per contract)


(b) “Sell to open” April $42 call for a credit of $1.15 or more ($115 per contract)


Directional View for Underlying Stock: Neutral to bullish


Personal Finance Portfolio: Income

  •    Tell your broker:
  • For a diagonal spread (preferred):

I’d like to enter an option spread order on Verizon (VZ) stock. Specifically, I want to buy to close the January $45 call and sell to open the April $42 call for a net credit of $1.13 per share or more.

  • For a two-part trade:
I’d like to buy to close the January $45 call on Verizon (VZ) stock for a debit of $0.02 per share or less.

I’d like to sell to open the April $42 call on Verizon (VZ) stock for a credit of $1.15 per share or more.

Please note: The important thing is to achieve a net credit on the roll (i.e., both trades) of $1.13 or more. The specific limit prices of the individual “buy to close” and “sell to open” trades are just starting points and should be adjusted as needed, keeping the net credit of the overall roll in mind.

 

3. Diagonal Spread Roll of Dominion Resources (NYSE: D) to April

  • “Buy to Close” January $55 Call

and

  • “Sell to Open” April $52.50 Call


Option Symbols: D130119C55 and D130420C52.5

Limit Order Price: Net credit of $1.05 or more ($105 per spread)


If your broker doesn’t allow option spreads, then you’ll have to do two separate single-option trades:

(a) “Buy to close” January $55 call for a debit of $0.05 or less ($5 per contract)


(b) “Sell to open” April $52.50 call for a credit of $1.10 or more ($110 per contract)


Directional View for Underlying Stock: Neutral to bullish


Personal Finance Portfolio: Income

  •    Tell your broker:
  • For a diagonal spread (preferred):

I’d like to enter an option spread order on Dominion (D) stock. Specifically, I want to buy to close the January $55 call and sell to open the April $52.50 call for a net credit of $1.05 per share or more.

  • For a two-part trade:
I’d like to buy to close the January $55 call on Dominion (D) stock for a debit of $0.05 per share or less.

I’d like to sell to open the April $52.50 call on Dominion (D) stock for a credit of $1.10 per share or more.

Please note: The important thing is to achieve a net credit on the roll (i.e., both trades) of $1.05 or more. The specific limit prices of the individual “buy to close” and “sell to open” trades are just starting points and should be adjusted as needed, keeping the net credit of the overall roll in mind.

4. Sell March Covered Call on Cameco (NYSE: CCJ)

  • “Sell to Open” March $21 Call


Option Symbols: CCJ130316C21

Limit Order Price: Net credit of $1.05 or more ($105 per spread)


Directional View for Underlying Stock: Neutral

Trade Rationale for Cameco

The stock has rebounded strongly to $21.10 since hitting a mid-November low of $16.41. I don’t see much more upside in the near term as there is a lot of overhead resistance in the $21-$22 area, so it’s time to re-initiate a covered-call position.

Price Adjustments Regarding the DFS, D, and VZ Roll Trades

For the Discover, Dominion, and Verizon trades, there is little risk of having the underlying stock called away because the stock prices are currently below the call strike prices. As such, you can be more stubborn about your limit prices for the roll credit. If any of the limit credit prices don’t fill, you can wait until next week to sell an April covered call (unless the underlying stocks move above the short call strikes during Friday’s trading, in which case you’ll need to buy back the January calls prior to Friday’s market close).

Let Celgene, Diageo, and Monsanto Covered Calls Get Assigned

All three of these covered calls are deep in the money and rolling them would either generate debits or minuscule credits. Your personal tax situation may argue otherwise, but for those who have a cost basis in the stock close to the current price, consider preserving cash flow and let these three calls get assigned, resulting in the sale of the stocks.

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