Trading Idea: Noble Corporation (NE) Covered Call

Noble Corporation (NE) is an offshore drilling contractor; a covered call strategy on the stock was discovered by the ONN Idea Generating Platform (IGP) today. The strategy is for those moderately bullish on the underlying stock but who want to enjoy a bit of protection.

NE Covered Call Trade Details:
*Sell and purchase prices derived from the bid and ask, respectively, at the time of publication.

NE is trading at $30.89. The stock drifted lower for much of June but appears to be consolidating around the 30 level. Investors who believe NE has little short-term downside could create a hedged position by buying the stock and selling calls.

Covered Call –

• Sell the August 31 call (basically at-the-money) for $2.15 per contract.
• Buy 100 shares of stock for every sold call (current price for 100 shares is $3,089).

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

Profit/Loss Details:

Maximum profit, if assigned, is $2.26 (7.3%), or the premium received plus the difference between the strike price and the stock purchase price.

The maximum risk stems from a fall in the stock price and is calculated as strike price minus the premium collected, or $28.85. Breakeven is the stock price at the time of purchase minus premium received, or $28.74. In other words, NE has to drop nearly 7% before this covered-call investor enters losing territory. At this level, the stock investment has lost $215 but is offset by the $215 collected from selling the call.

A covered call has essentially three possibilities. NE can be flat, leaving the out-of-the-money call to expire worthless. The investor keeps the premium and gains nothing on the purchased shares. If the shares decline, the option again expires worthless and the investor keeps the premium but will take a loss on the stock. In both of these scenarios, the covered call outperforms the stock side of the trade. If NE rises above the 31 strike, the option will likely be exercised, capping the stock’s upside.

If covered calls aren’t your favorite strategy, keep an eye on the "Trading Idea" section of www.ONN.tv for more ideas, courtesy of the ONN Idea Generating Platform.