Monday, April 19, 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 May2010:
04/19/2010 Bought 300 PKG @ $25.06
04/19/2010 Sold 3 PKG May2010 $25.00 Calls @ $1.05

The CCAP Apr2010 covered calls position in PKG was assigned this past weekend. Upon further analysis of Packaging Corp., the Covered Calls Advisor decided to establish a new covered calls position with a May2010 expiration. 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.

Containerboard stocks are well positioned now and enjoy the following potential 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; (2) analysts' current average earnings estimates are low in comparison to likely results for the next several quarters; and (3) a continued rebound in packaging demand.
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.

This covered calls position was established ahead of the earnings release after the market closes today. It was decided to establish this position prior to this earnings release to take advantage of: (1) this advisor's belief that the catalysts described above for PKG will begin to be reflected in today's earnings report; and (2) selling the call options currently somewhat inflated implied volatility (Note: the implied volatility was about 30 when the PKG options were sold today) because of the uncertainty caused by the impending earnings report. The implied volatility is likely to compress significantly beginning tomorrow (after the earnings release), which is a profitable outcome for us options sellers.

As shown in the "Buy Alerts" spreadsheet below, PKG has a 'Total Points' rating of 15.32 which achieves the Covered Calls Advisor's desired minimum threshold of 15.0 points:

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

Possible overall performance results(including commissions) for the PKG transactions would be as follows:
Stock Purchase Cost: $7,526.95
= ($25.06*300+$8.95 commission)

Net Profit:
(a) Options Income: +$303.80
= (300*$1.05 - $11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock assigned at $25.00): -$26.95
= ($25.00-$25.06)*300 - $8.95 commissions

Total Net Profit(If stock assigned at $25.00): +$276.85
= (+$303.80 +$0.00 -$26.95)

Absolute Return if Assigned at $25.00: +3.7%
= +$276.85/$7,526.95
Annualized Return If Exercised (ARIE) +40.7%
= (+$276.85/$7,526.95)*(365/33 days)