HOW TO WRITE COVERED CALLS - A REAL CASE STUDY!
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PAGE #3 Date: Saturday, Feb. 08, 1997
The stock: ROSS STORES (ROST) Last traded at $44.00 up 1/2 on Fridays' close. 2 for 1 split - Record date Feb. 11, 1997! Will increase dividend also!
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REVIEW OF THE DATA - I ASKED MYSELF THESE QUESTIONS!
A. WHY DO I LIKE THIS STOCK?
B. WHAT ARE THE TIME LINES (EVENTS)?
C. WHAT COVERED CALL STRATEGIES WILL I EMPLOY?
D. HOW WILL I PAY FOR IT?
A. WHY DO I LIKE THIS STOCK? I like ROSS Stores because the prices are good and you can buy name brands items at a discount compared to the mall stores. You know, maybe other people will have the positive impression as me?
OTHER FACTORS!
Zacks' Research indicates that: ROST RANKED 32/58 IN RETAIL-APP/SHO IND RANKED 100/211, Zacks recommends ROST as a strong buy!
The last two quarters have been above expectations in earnings. The last quarter earnings report on 10/96 came in 16.79% over estimates or $0.64 vs. $0.55. Well, we know that they are making money lately! That backs up the latest EPS of 92.
Note - the next earnings report is due out on March 18, 1997. Let me write that down!
The company is increasing the dividend to $.045 and the record date is set for March 10, 1997 to be paid out on April 07, 1997. Well, that is a nice bonus to add to the pot! Let me write that down!
The PE is only 16 and the DOW PE is around 20. Not bad, it is undervalued for sure. Let me crunch a few more numbers:
MATH WORK: Current PE 16 x $3.05 FY96 EPS = $48.80/share. Hey, the stock is selling for $44.00! Next year stock price range? Current PE 16 x $3.40 FY97 EPS = $54.40/share. High end of the range with a PE 19(FY96)x $3.40 FY97 EPS = $64.60. So, the stock should be selling from $54.40 to $64.60 pre-split prices. After the 2-1 split, low side $27.20 to $32.30 on the high side. Let me write that down!
B. WHAT ARE THE TIME LINES (EVENTS)?
Record Date for Split: 2 for 1 split - Record date Tuesday, Feb. 11, 1997! That means I will buy the calls on Monday, Feb. 10, 1997. I need to decide what strike price and month! Check it Out!
I will buy the ROST calls Monday, Feb. 10, 1997 and the actual split will take place around Wednesday, March 05, 1997 according to the IBD paper. I don't want to dish out the money soon so that means I want to exercise my right to buy the stock on soon after the Feb. 11, 1997 record date (say Thursday, Feb. 27, 1997)when the notice in my account indicates that the calls are now worth 200 shares (2-1 split) per contract (if rights are excercised)!
Note - as soon as I know that it is recorded, I must take possession of the stock FOUR BUSINESS DAYS BEFORE the dividend record of Monday, March 10, 1997 in order to get the dividend. That means Tuesday, March 04, 1997.
END OF PAGE #3 CONTINUE TO PAGE #4
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DISCLAIMER: The writer is presenting a real stock and a live ongoing case study. No recommendations or endorsement to actually buy this stock are suggested nor implied. Trading stocks and buying calls should not be attempted without first understanding the risk/rewards of this type of investment!
The writer assumes no responsibility for the opinions being expressed!
Buyers always be aware!
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