Because the stock has advanced so far so fast, it can be hard to pick a good time point to sell a covered call. At time of writing, Krispy Kreme Doughnuts had closed at $13. On that day, the soon to expire February $13 strike call option traded at $0.40, the same strike March call went for $0.63 and the May $13 call at $1.10. However, when profit taking does kick in, Krispy Kreme could take a sharp fall. If you are unwilling to sell, but still want to take money off the table, then writing a call at a lower strike price (below $13) offers an additional $0.10-$0.20 in time premium at May expirations.
The last stock, Tenet Healthcare Corporation (NYSE:THC), has enjoyed a good run since last summer, helped by Obama’s re-election. Negative opinion on the stock has focused on high debt management risk, weak operating cash flow and poor profit margins. However, the company was able to secure sub-5% notes in a new record for the company. This will bring improvements to cash flow and debt management as more expensive debt is refinanced. The company’s debt has become more attractive because of the benefits the Affordable Care Act will bring to the sector over the long term. Health care spending arising from the Act is expected to grow from $2.8 trillion in 2012 to 4.8 trillion in 2021, a 70% increase. Existing earnings have also enjoyed significant growth. Tenet Healthcare reported net income of $31 million in Q3 (EPS of $0.28), compared to $14 million in the same quarter in 2011. Projections call for an EPS of $0.70 in Q4, compared to a reported $0.32 last year.
As a defensive stock, Tenet Healthcare should be more resilient to a drop in the broader market. The stock is still enjoying the early phase of a new rally after a lengthy period of sideways action. Where before the stock found sellers when it climbed above $25, it should now find buyers. However, the price has doubled in less than a year, and around $40 a share it may be a little hot for its own good. May expiration strike $40 calls were priced at $2.05, with March expiration trading a respectable $1.45. The latter probably is the better offer.
The article Covered Call Opportunities originally appeared on Fool.com and is written by Declan Fallon.
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