Las Vegas Sands (LVS) Covered Call – Option Trading Idea

Las Vegas Sands (LVS) has recovered quite a bit since its dip down to $12.95 in late October. Even while the future for the stock is looking better, traders who are long the stock (or who are interested in buying shares) may want to consider a hedge in the form of a covered call, as outlined below.

More News On LVS

• LVS

• Most active New York Stock Exchange-traded stocks
  July 29, 2010
• Wynn Resorts earns $52.4M during second quarter
  July 29, 2010
• Most active New York Stock Exchange-traded stocks
  July 29, 2010

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LVS Covered Call Trade Details:

LVS is trading at $15.85.

Covered Call –

• Sell the January 16 call (out-of-the-money) for $1.50 per contract.
• Buy 100 shares of stock for every sold call (current price for 100 shares is $1,585).

Profit/Loss Details:

Maximum potential profit: If assigned, this is $1.65 (the premium received plus the difference between the strike price and the stock purchase price). Return on risk is approximately 11.5% in 45 days.

Maximum risk: $14.35 (the stock price at the time of purchase minus the credit).

Breakeven: $14.35 (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 LVS rises above the 16 strike between now and January expiration, the option will likely be exercised, capping the stock’s upside.

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