Protective Life Options Revive Hopes

Protective Life Corporation [[PL]] shares may not be the most attractive in the market, but the options market is offering investors another opportunity. Call options are trading at a substantial premium, which has created opportunity for covered call investors. However, savvy investors can use long-term options as a stock substitute to leverage returns even higher. This article will explore how…

The first decision investors must make is whether or not they want to own the Protective Life. The life insurance company saw its shares fall sharply in 2008 with the rest of the sector as several securities that they owned turned bad. However, the firm applied to become a bank holding company in November, which would give it access to government funds. Meanwhile, the company has worked to stabilize itself despite some poor investment decisions.

The $12.50 February 2009 call options are currently trading with a premium of $2.20 per contract. This means that investors can purchase 100 shares for $1,300, sell a call option for $220 and realize a 13.08% return on investment in just about a month. Alternatively, investors can purchase long-term options at a lower cost, sell the same call for $220 and realize an even higher return on investment. This strategy is known not as a covered call, but rather a diagonal spread.

While Protective Life doesn’t trade LEAPS options, there are July 2009 call options available as stock substitutes. The $10 July 2009 calls are trading for $6.60, which means investors can purchase the rights to 100 shares for $660 and immediately resell those rights for $220 – a 33.33% return on investment. The risk is that the written option gets called and the investor may need to exercise the senior calls or that the stock declines below the $10 strike price of the senior option.

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