Covered Call on Walgreen (WAG)

The covered call is a mildly bullish strategy.  The reason it is only mildly bullish is that the profit potential of the position to the upside is limited by the short call.   But the covered call can also partially offset a decline in the stock price (although the payoff diagram looks just like that of a short put).      

Walgreen (WAG) is a consumer cylical stock and as such by definition in a slowing economy not well positioned to bloom exceedingly.  Looking at the daily chart of WAG we note that since late September the stock has roughly traded in a range between $31.50 and $35.50.  Its 3 month at the money calls have a volatility of around 43.90.  That puts Walgreen in the top 15 stocks in the S&P 100 in terms of implied volatility.  As a seller of calls you will prefer to have somewhat elevated volatility in order to get more premium. 

The stock has resistance near the $35.50 mark but has the potential to break out above there.  However, given the macroeconomic environment it is not very likely the stock shoots much above the $36 mark in the near-term.  This fits the candidate for a covered call strategy.   

As of this writing the stock trades at $33.60.  A trader wanting to open a covered call on WAG could consider selling the April $36 strike calls for $1.60.  Above $36 (at expiration) the stock would get called away and the trader is protected down to just about $32.  Below $32 the stock may accelerate lower from a technical perspective, so that area would be a natural stop area.  The covered call investor would lose less than had he only bought the stock if he gets stopped out but still participates in the upside to the $36 area (plus gets to keep the premium if the stock closes above $36).

Share Button