Option Trading Idea: PALL Corporation (PLL) Covered Call

PALL Corporation (PLL) is up nearly 5% on the day amid takeover speculation. Selling an upside 35-strike call here would yield 3.1% in 20 days if the stock fails to reach this level. This strategy may also offer a hedge against a pullback if a deal doesn’t come through by November expiration.  If your stock is called away at $35, you would realize a 6.6% gain in less than a month’s time.

PLL Covered Call Trade Details:

PLL is trading at $33.81.

Covered Call –

• Sell the November 35 call (out-of-the-money) for $1.05 per contract.
• Buy 100 shares of stock for every sold call (current price for 100 shares is $3,381).

Profit/Loss Details:

Maximum potential profit: $2.25 (the premium received plus the difference between the strike price and the stock purchase price).

Maximum risk: $32.76 (the stock price at the time of purchase minus the credit).

Breakeven: $32.76 (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. If the shares decline, the option again expires worthless and the investor keeps the premium but will take a loss on the stock. In scenarios one and two, the covered call outperforms the stock side of the trade.
3. If PLL rises above the 35 strike between now and November expiration, the option will likely be exercised, capping the stock’s upside.

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