A Covered Call or buy-write strategy is a slightly bearish strategy investors use to increase returns on positions investors already own. Profits are limited to the strike price of the short call option minus the purchase price of the underlying security, plus the premium received. For long-time stockholders, a covered call strategy is useful to generate additional income in scenarios where they do not expect much movement in the price of the underlying security.
Investors who do not already own the stock may open a new trade by simultaneously purchasing 100 shares of the underlying security, and selling a call option - with the intention the call option will be exercised at or before expiration.
Two possible outcomes
Outcome 1: The call option expires “in-the-money”, and the covered call seller sells their stock to the option buyer for an agreed-upon price (the strike price). The investor keeps the option premium, and any other income (i.e. dividends) received while they owned the underlying security. Investors who are seeking a quick trade to earn some additional weekly income will appreciate this strategy.
Outcome 2: The call option expires “at-the-money”, or “out-of-the-money” and expires worthless. The option seller gets to keep the stock, the option premium, and any other received income (i.e. dividends). At that point, the option seller can sell another covered call, close the position, or simply hold their stock for a future opportunity.
This trade considers two potential ideas. The first idea assumes a high probability that the investor will close out their trade and crystalize their returns. The other assumes a long-time investor wishes to collect a little extra option premium while maintaining a high probability of keeping their shares.
Today, in focus is Nucor Corporation.
Nucor Corporation is the largest steel manufacturer in the United States. The company sells steel and steel products both in the United States and internationally. It operates in three segments: Steel Mills, Steel Products, and Raw Materials. The Steel Mills segment produces hot-rolled, cold-rolled, and galvanized sheet steel products; structural steel products, including wide-flange beams, beam blanks, H-piling, sheet pilings, etc. The Steel Products segment produces steel joists and joist girders, steel decks, fabricated concrete reinforcing, and cold-finished steel products, steel fasteners, metal building systems, etc.
Nucor has raised its dividend for 48 consecutive years, qualifying it as a dividend aristocrat, a company that is listed on the S&P 500 Index, and has increased its dividend for at least each of the past 25 years.
Despite the fact that the materials business is highly volatile, Nucor stocks are up a whopping 76.81% from 5 years ago, thanks to a strong economy. Moreover, the company maintains a highly profitable bottom line and has an attractive dividend yield of just under 2%.
The company reported net earnings of $2,250.4 million or $7.97 per share in fourth-quarter 2021, surging from $398.8 million or $1.30 per share in the year-ago quarter. As a result, volatility is up, and shares are up nearly 8% in the last 5 days, making it a good candidate for a covered call trade as investors could realize a whopping 297% annualized return in less than 3 days.
2 Nucor Covered Call Trade Ideas
NUE $102 Call Option Expiring 2022-02-04
Investors who do not currently own NUE, and don’t mind having their shares exercised may opt for the NUE $102 call option expiring 2022-02-04. For this trade, the investor would purchase 100 shares of NUE at the current price of $101.40/share, and simultaneously sell 1 call option contract on NUE with the $102 strike price, and February 4, 2022 expiry. Based on the current bid price, investors can expect $1.83/share in option premium. Further, at this strike, there is an approximate 46.5% chance of their stocks being called away sometime between now and expiration. Should this happen, investors will realize a 297% annualized return.
We calculate annualized return in the following way:
- Net initial outlay: $99.57 ($101.40-$1.83)
- If called away, the investor gets: $102.00
- Difference/Potential profit: $2.43 (In 3 days)
To calculate the annual return, we use the following formula: (2.43/99.57)/3*365 = 296.9%
NUE $108 Call Option Expiring 2022-02-04
Longtime holders of Nucor might prefer not to crystalize any long-term capital gains. Rather, they. may want to collect additional option premium, and while having a high likeliness to keep their shares. Those investors might consider an out-of-the-money call option at the $108 strike price, expiring February 4, 2022. Each contract represents 100 shares of Nucor Corp., and the $108 call will provide a $0.28/share in option premium. Considering the -0.14338 delta on this option, there is about an 86% chance the option will expire worthless at expiration. If $0.28/share isn’t appealing, the $106 call offers $0.58/share in option premium and an approximate 80% chance of expiring worthless.
*Disclaimer: On the date of publication, Rick Orford did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. Data as of pre-market Feb. 1, 2022.
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