I've written covered calls against 60% of my SFAM shares. Let me explain how this works. I chose the July 30 Calls that are going for 4.75 each. With the closing stock price of $30 7/8, that means that the shares that are covered have 15.4% downside protection (4.75 divided by 30.875). If the stock does remain above $30, then I receive 12.6% over 94 days. That is 49% annualized!
To see how my portfolio would actually do, you must blend the 60% of my shares that are covered with the 40% that are not covered. My maximum profit is still achieved if the stock goes up strongly. Still, if it does not increase much, or if the resistance around $31 holds, then I'll get paid a little bit while I wait for the stock to take off.
Obviously, I am not as bullish as I have been in the past on the stock's prospects. This has to do mostly with the valuations. The price/sales ratio is currently 2.44 (based on sales per share of $12.66, which is calculated using the shares outstanding at the end of the last quarter--not the weighted average over the last year--as the denominator). Previous P/S ratios at major peaks have been between 2.1 and 4.7. Clearly, we have a long way to run if we return to the P/S of 4.7 or even higher. My position now is trying to take into account, though, that the peak may occur close to the 2.1 side of the range.
With 17% of my money still in SFAM common stock, my heart is still with the bulls. My head, though, has tempered my strongly bullish position a bit based on the increasing valuations.
Profitable investing,
Mr. Sam |
