DOW Chemical Co. was brought to our attention by a member in the LIVE trading room. Comments followed, ending with, “and it looks like a good income trade.” While I agree, there are three ways to look at the stock, aside from just buying the stock of course.
One day later the stock closed at just above the 9ema. The stock is trending and earnings are not due till APRIL 26. This is important as we prefer no earnings announcements while we hold our position. We will look at April expiry.
If you are very bullish on Dow Chemical Co. (DOW)
You could generate $210 by trading a covered call. You could sell 10 contracts of DOW 2017 21-APR 67.50 CALL. If the stock were to rise before expiration you could make a profit of $4,200. This trade will also get you 0.3% worth of downside protection for your stock. Premium: $210 Potential Profit if Stock is Above Strike: $4,200 Downside Protection: 0.3%
If you are bullish on Dow Chemical Co. (DOW)
You could generate $780 by trading a covered call. You could sell 10 contracts of DOW 2017 21-APR 65.00 CALL. If assigned, you could make a profit of $2,270. This trade will also get you 1.2% worth of downside protection for your stock.
Premium: $780 Potential Profit if Stock is Above Strike: $2,270 Downside Protection: 1.2%
If you are neutral on Dow Chemical Co. (DOW)
You could generate $1,970 by trading a covered call. You could sell 10 contracts of DOW 2017 21-APR 62.50 CALL. If assigned, you could make a profit of $960. This trade will also get you 3.1% worth of downside protection for your stock.
Premium :$1,970 Potential Profit if Stock is Above Strike:$960 Downside Protection: 3.1%
What are my risks and my rewards?
Your reward is to the upside. Your stock gets called away, you keep the premium and the number assigned to the phrase “Profit if Stock is Above Strike” is your total income for the trade. After earnings, we may or may not be interested in buying the stock and repeating the trade.
Your risk is the stock pulls back to your “break even” point. This is the phrase “Downside Protection”. If the stock pulls back to this number, it is important to note, you lose nothing but time. You sell (liquidate) your shares and buy back the call(s) you sold. Your done and lose nothing.
The stock may also pullback more dramatically on some unforeseen catalyst or announcement while you are in the trade. We frequently buy OTM puts as insurance. Subtract the cost of our puts from the total “Potential Profit” and you are done. Now you can enter a trade knowing before hand, what you will make, including insurance.
This is what I’ve done over the past 29 years, to grow my account(s). Initially, a broker was advising me. Soon thereafter, I came to realize I could do this and gain financial independence.
Methodically and systematically using a strategy based approach each and every day, week and month of the year, will result in financial security. Think value and soon you’ll become a mini Warren Buffett.
Happy Trading – Vinny
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