Trading Idea: Overstock.com (OSTK) Covered Call

Online shopping concern Overstock.com (OSTK) showed up on the ONN Idea Generating Platform (IGP) today. This covered-call strategy is for those moderately bullish on the underlying stock.

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

OSTK shares are trading at $12.00.

Covered Call –

• Sell the July 12.50 call (out-of-the-money by 4.2%) for $0.65 per contract.
• Buy 100 shares of stock for every sold call (current price is $12 per share, or $1,200 for 100 shares).

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 $1.15, or the premium received plus the difference between the strike price and the stock purchase price. The maximum profit, if not assigned, is the gains in the stock plus the premium received.

Maximum risk is theoretically strike price minus the premium collected, or $11.35.

A covered call has essentially three possibilities. OSTK can be flat, leaving the out-of-the-money call to expire worthless. The investor keeps the premium. If the shares decline, the option again expires worthless and the investor keeps the premium. In both of these scenarios, the covered call outperforms the stock. If OSTK rises above the $12.50 level, the option will likely be exercised, capping the upside of the stock at $12.50.

If you aren’t a fan of covered calls (or of Overstock), keep an eye on the “Trading Idea” section of www.ONN.tv for more ideas, courtesy of the ONN Idea Generating Platform.