Friday, January 8, 2010

Establish Packaging Corporation of America Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Packaging Corporation of America (PKG) covered calls as follows:

Established Packaging Corporation of America (PKG) Covered Calls for Jan2010:
01/08/2010 Bought 300 PKG @ $23.89
01/08/2010 Sold 3 PKG Feb2010 $25.00 Calls @ $.80

Packaging Corporation of America produces containerboard and corrugated products in the United States. Its corrugated packaging products include conventional shipping containers used to protect and transport manufactured goods; and multi-color boxes and displays to merchandise the packaged products in retail locations, as well as meat boxes and wax-coated boxes for the agricultural industry. Packaging Corporation offers its products through a direct sales and marketing organization. The company was founded in 1867 and is headquartered in Lake Forest, Illinois.

Credit Suisse recently issued a very bullish analysis of containerboard stocks in which they highlighted the following catalysts: (1) containerboard pricing is poised to increase as the overall economy improves since the industry is already operating at 95% of capacity while current inventories are at 15-year lows; and (2) analysts' current average earnings estimates are low in comparison to likely results for the next several quarters.
More specifically for Packaging Corp., it is poised to benefit dramatically from higher containerboard prices while controlling costs from the expected relatively modest increases in its raw material inputs which come almost exclusively from softwood trees (as opposed to the more expensive alternative of recycled boxes). PKG has solidly defensive characteristics since over 80% of revenues come from food and other non-durable categories. As shown in the "Buy Alerts" spreadsheet below, its current fundamentals are strong and it is led by a highly-regarded management team. This advisor believes that there is minimal downside risk for this stock -- so a moderately deep-out-of-the-money (4.4% OTM) covered calls position was established.

The 'Buy Alerts' spreadsheet below shows that PKG has a 'Total Points' rating of 20.04 which meets the Covered Calls Advisor's desired threshold of 20.0 points.






















Note: For expanded view, left click on the spreadsheet above.


Some possible overall performance results(including commissions) for the PKG transactions would be as follows:
Stock Purchase Cost: $7,175.95
= ($23.89*300+$8.95 commission)

Net Profit:
(a) Options Income: +$228.80
= (300*$.80 - $11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $23.89):
-$8.95 = ($23.89-$23.89)*300 - $8.95 commissions
(c) Capital Appreciation (If exercised at $25.00): +$324.05
= ($25.00-$23.89)*300 - $8.95 commissions

Total Net Profit(If stock price unchanged at $23.89): +$219.85
= (+$228.80 +$0.00 -$8.95)
Total Net Profit(If stock price exercised at $25.00): +$552.85
= (+$228.80 +$0.00 +$324.05)

Absolute Return if Unchanged at $23.89: +3.1%
= +$219.85/$7,175.95
Annualized Return If Unchanged (ARIU) +26.0%
= (+$219.85/$7,175.95)*(365/43 days)

Absolute Return if Exercised at $25.00: +7.7%
= +$552.85/$7,175.95
Annualized Return If Exercised (ARIE) +65.4%
= (+$552.85/$7,175.95)*(365/43 days)

1 comment:

  1. This is an excellent example of a well-researched covered call: Underlying in an uptrend, sold option has only about a month of life left, and total return if called consists of capital gain plus premium. This trade has been shared with the readership of http://www.safe-options-trading-income.com/Options-Trading-blog.html as a practical example of a well-conceived covered call. Thanks for sharing.

    ReplyDelete