Option Trading Idea: Research in Motion, Limited (RIMM) Covered Call

If you believe Research in Motion, Limited (RIMM) still has a chance to fight back for market share in the mobile communications industry, buying its shares below $60 might best be done with a covered call strategy for some extra downside cushion.

RIMM Covered Call Trade Details:

RIMM is trading at $59.77.

Covered Call –

• Sell the December 60 call (out-of-the-money) for $3.75 per contract.
• Buy 100 shares of stock for every sold call (current price for 100 shares is $5,977).

Profit/Loss Details:

Maximum potential profit:, if assigned, is $3.98 (the premium received plus the difference between the strike price and the stock purchase price).

Maximum risk: $56.02 (the stock price at the time of purchase minus the credit).

Breakeven: $56.02 (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 RIMM rises above the 60 strike between now and December expiration, the option will likely be exercised, capping the stock’s upside.

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