NaughtyPines

CHK COVERED CALLS

Long
NYSE:CHK   None
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Truth be told, I hardly ever do covered calls. This is because a covered call requires you to take a position in the underlying and then proceed to sell options against the position in an effort to reduce your cost basis in the stock; in other words, it ties up buying power while you reduce cost basis.

However, since I've got a bit of buying power sitting on the sidelines here as earnings announcements dwindle, this is probably a good time to consider putting one or more of these on if I can find something worthwhile. Ordinarily, I look to put these on in beaten down underlyings that are liquid and that are going for a price of less than $10 per share because I don't want to devote that much buying power to the endeavor.

CHK is one of those underlyings that is at or near a 52-week low, goes for about $5.00 per share, and is at high volatility (meaning richer premium for the short call), and (if you can hold the stock long enough), involves a potential modest dividend to boot.

Here's an example setup:

100 shares CHK at 5.11/Jan 15 6 short call
BPE: ~$557 (You're buying 100 shares of CHK (currently at 5.11 for $511 plus receiving a credit of $47 for the short call)
Max Profi: If price of the underlying is greater than $6 at expiration, the underlying stock is called away and sold at $6/share; if price of the underlyiing is less than $6 at expiration, you continue to maintain a long position in the stock and keep the premium, thus reducing your cost basis in the position by the amount of premium received. You then repeat the process of selling short calls against to reduce your cost basis.

In the example given, the maximum profit potential for the trade if the stock is called away a $6 per share isn't much; depending upon how long you want to tie up buying power to this modest position and how you feel about it overall generally, you may want to consider going farther out in time with the short call, which will allow you to collect more premium, but my general preference with these is to initiate the position and start selling short calls against 30-45 DTE and see how things go.

Comments

The more I read about this company, the less I like the play. Consider this, then, as merely an example of what you can do with covered calls. I'll look for beaten down opportunities elsewhere to do covered calls in; CHK has been beaten down for a reason; it sucks as a company ... .
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