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Friday, June 18, 2010

Establish Gap Inc. Covered Calls

A new covered calls position was established in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Gap Inc.(GPS) covered calls as follows:

Established Gap Inc.(GPS) Covered Calls for Jul2010:
06/18/2010 Bought 300 GPS @ $21.55
06/18/2010 Sold 3 GPS Jul2010 $22.00 Calls @ $.60

The Gap, Inc., is a specialty retailer offering clothing, accessories, and personal care products for men, women, children, and babies primarily under the Gap, Old Navy, and Banana Republic brands. It operates over 3,000 stores located primarily in the United States, but also with international locations in Canada, the United Kingdom, France, Ireland, and Japan which account for about 10% of sales. Same-store sales have been trending downward each year since 2004. But the Gap brand and Old Navy have now had positive same-store comparables for the past four months, something which has not occurred since 2004. In addition, senior management has done a stellar job of gross margin and expense control under the excellent leadership of CEO Glenn Murphy -- He demonstrated a detailed understanding of Gap's financials and is clearly focused on cash flow metrics. His vision for the company's brand development initiatives, plans for domestic market share gains, and international growth plans is impressive and provides continued impetus for the Covered Calls Advisor's commitment to this investment in Gap Inc.

The Buy Alerts spreadsheet below shows that Gap's financials are value-oriented at this time, and the total points rating of 19.18 is well above the Covered Calls Advisor's desired "Buy" threshold of 15.0. If a combination of continued strong expense management (very likely) along with higher same-store comps (reasonably likely) occurs in 2010, then a bullish stock response this year is also very likely.





















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


Some possible overall performance results(including commissions) for the GPS transactions would be as follows:
Stock Purchase Cost: $6,473.95
= ($21.55*300+$8.95 commission)

Net Profit:
(a) Options Income: +$168.80
= (300*$.60 - $11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $21.55):
-$8.95 = ($21.55-$21.55)*300 - $8.95 commissions
(c) Capital Appreciation (If exercised at $22.00): +$126.05
= ($22.00-$21.55)*300 - $8.95 commissions

Total Net Profit(If stock price unchanged at $21.55): +$159.85
= (+$168.80 +$0.00 -$8.95)
Total Net Profit(If stock price exercised at $22.00): +$294.85
= (+$168.80 +$0.00 +$126.05)

Absolute Return if Unchanged at $19.76: +2.7%
= +$159.85/$6,473.95
Annualized Return If Unchanged (ARIU) +31.1%
= (+$159.85/$6,473.95)*(365/29 days)

Absolute Return if Exercised at $20.00: +4.6%
= +$294.85/$6,473.95
Annualized Return If Exercised (ARIE) +57.3%
= (+$294.85/$6,473.95)*(365/29 days)

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