Dell Inc. (NASDAQ: DELL) covered call

Last week, we recommended a long call in Dell Inc. (NASDAQ: DELL) where we bought the April 14 call for 32 cents. That call is now trading for 65 cents since the underlying stock has rallied 6% to $14.25 from $13.45. While the odds of another 6% rally – and another double on a call play – in fewer than 10 days is unlikely, we still like this name. Today we’re considering a buy-write. Buying the stock at $14.25 and selling a May 15-strike covered call for at least 50 cents will give us a nice “cushion” and an effective cost on the shares of about $13.75. Plus, we get all the appreciation from here to $15 if the stock should rally above our short strike and our shares get called away.

More News On DELL

• DELL

• Final Glance: Computer companies
  July 29, 2010
• A look at recent tech-industry earnings
  July 29, 2010
• Midday Glance: Computer companies
  July 29, 2010

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DELL Covered Call Trade Details:

DELL is currently trading at $14.25, down roughly 0.3% today.

Covered Call –

• Sell the March 15 call (out-of-the-money) for $0.50 per contract (or better).
• Buy 100 shares of stock for every sold call (current price for 100 shares is $1,425).

A free virtual trading account can help you visualize the maximum profit, maximum loss, and breakeven level for this covered call trade.

Profit/Loss Details:

Maximum potential profit:, if assigned, is $1.25. Return on risk is approximately 9%.

Maximum risk: $13.75 (the stock price at the time of purchase minus the credit).

Breakeven: $13.75 (the stock price at the time of purchase minus the credit).

A covered call has essentially three possibilities:

1. The stock can stay flat, leaving the out-of-the-money call to expire worthless. The investor keeps the premium and gains nothing on the purchased shares.

 

2. The stock can decline, at which point the option again expires worthless and the investor keeps the premium but takes a loss on the stock. In scenarios one and two, the covered call outperforms the stock side of the trade.

 

3. If DELL remains above the 15-strike between now and March expiration (in six trading days), the option will likely be exercised, capping the stock’s upside.

For more on DELL:

Selling long-term puts in Dell (NASDAQ: DELL)

Early Glance: Computer companies

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