Three Great Covered Call Opportunities

Writing a covered call is one of the most common options strategies for long-term investors. Investors can make a profit by simply agreeing to sell shares at a certain price within a certain number of days. The profitability of covered call trades are measured by the return on investment – that is, the call option’s premium divided by the stock’s current market price. We’ll show you three covered call plays that offer a large return on investment and introduce a new spin on the strategy!

Sequenom, Inc. [[SQNM]] is a biotechnology firm that has been having a great year as the rest of the market suffered. While the stock has been performing well, the options may represent the true opportunity for traders and investors. The $22.50 February 2009 calls are currently trading with a bid price of $4.20 while the stock is trading at $23.02 per share. The subsequent return on investment is nearly 16% with only about a month until expiration.

Cypress Bioscience, Inc. [[CYPB]] is another biotechnology firm that has had a great few weeks. The stock is up nearly 40% from its near-term lows, but the options also present a great opportunity. The $10 February 2009 calls are trading with a bid price of $1.15, which gives it a 15.67% return on investment with only about a month until expiration. Again, this is a very attractive annualized return for investors already looking to get involved in this stock.

UAL Corporation [[UAUA]] shares have been flat over the past few months, but its options also present a great opportunity. The parent company of United Airlines saw its $12.50 February 2009 calls rise to $1.85, which gives it a 15.11% return on investment with only about a month until expiration. Like the stocks mentioned above, UAL corporation’s options also present an opportunity for those investors bullish on the airline’s prospects.

Investors looking to take on less dollar-risk and increase their returns may want to consider using LEAPS options as a stock substitute and creating a diagonal spread. Since the long-term purchased options can be converted into the stock (potentially required) to deliver on the shorter-term written options, the position is allowed without requiring any special permission from brokerages. Meanwhile, the lower cost to establish the position equates to a higher return on investment.

See “A Better Covered Call Alternative” for more information on this strategy or our Tools & Products section for more ways to profit using LEAPS.

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