It’s easier than you think to profit on Wall Street’s follies…
I run several financial advisory and coaching services. The first time I coach someone to sell an in-the-money call, I get interesting emails.
Interesting is the kindest way to describe a few of them.
One question I’m regularly asked: “You want me to sell an in-the-money call with a strike price below the cost of my shares?”
Yes, I do. And something happened in the market this past week that shows how this strategy can really work well when volatility hits a stock.
Dicks Sporting Goods (DKS) had earnings that beat a weak forecast, and the stock popped almost 10%. It traded down, and then traded back up. But I’m not writing about DKS. I am writing about another company that for some reason trades with DKS: Coach (COH).
No, this isn’t a joke.
When DKS reported those earnings, footwear companies did well—Nike (NKE), Skechers (SKX) and Foot Locker (FL) come to mind.
Be patient… I’m getting to Coach.
Wall Street, in its infinite wisdom, lumps accessories and footwear together and often trades them together. Sure… people buying golf clubs and cross trainers are also buying $300 leather backpacks, right?
Anyway, the volatility in Coach is way up, as are premiums on the calls. Take what the gods of the market give you. Buy the shares at market (as I write this the stock is just pennies north of $39), and sell the May, Week Four 39 call.
Somebody’s willing to pay you $0.60 or $60 per 100 shares for the contract. If you get called out, you net $55 on 100 shares in a week or less. That’s a return of 1.41%. If you make the trade 52 times a year, that’s an annual return of 73.33%.
Think about it…