Trading Idea: General Mills (GIS) Buy-Write

This morning ahead of the open, General Mills (GIS) announced quarterly earnings of $1.28 per share (excluding items). This easily topped analysts’ per-share estimates of $1.02. Earnings overall were up 51% from the previous year.

A buy-write strategy – selling an upside call and buying the shares – could be a good way to play the shares of this cereal name in a conservative manner. While this trading idea isn’t overly exciting, it could serve as a decent income plan following these strong earnings results. Traders who hold through early October will also reap the benefit of a dividend payout on the purchased shares.  

GIS Buy-Write Trade Details:
*Sell and purchase prices derived from the bid and ask, respectively, at the time of publication.

GIS is trading at $63.82.

Buy-Write –

• Sell the November 65 call (out-of-the-money) for $1.25 per contract.
• Buy 100 shares of stock for every sold call (current price for 100 shares is $6,382).

The sold call is effectively "covered," just like a covered call, because if the option were to be exercised by the buyer, you already own the shares required to fulfill the contract.

Profit/Loss Details:

Maximum potential profit, if assigned, is $2.43, or the premium received ($1.25) plus the difference between the strike price and the stock purchase price ($1.18).

The maximum risk stems from a fall in the stock price and is calculated as stock price minus the premium collected, or $62.57. In other words, your stock position would participate in any declines all the way to zero, and be modestly offset by the premium collected for the sold call.

Breakeven is also the stock price at the time of purchase minus premium received, or $62.57. In other words, GIS has to drop about 2% before the buy-write trader enters losing territory. At this level, the stock investment has lost $125 but is offset by the $125 collected from selling the call.

The buy-write strategy 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 GIS rises above the 65 strike before November expiration, the option will likely be exercised, capping the stock’s upside.

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