HPQ Covered Call This covered call play in HPQ is partially an earnings play as well as longer term investment into October.
HPQ reports earnings tomorrow after the bell, and currently has an inflated IV rank of 69%, IV 32.9%
At the moment, the expected move is +/- 0.9 or 4.7%. Most of the previous 8 earnings reports the stock moved a wider range than this. (Half gaining and half losing).
The October 20 covered call at the 32 delta, $20 strike filled instantly for 18.70. This gives a max profit of $130 above $20 by expiry or total return of 6.95% over cost of 18.70.
If the call expires worthless, the call premium returns almost 2% on the current stock price (at 59 D.T.E. yields 12% annualized) and I'll aim to continue selling calls against it.
With a stock price of 19, a round lot of the stock uses a small part of the portfolio buying power.
HPQ as a stock has been improving lately, and some of the fundamentals I'm bullish on are:
- Free cash flow yield of 5.4% should support the price of the stock
- 2.85% dividend yield (payout ratio under 50%) should support the price of the stock.
- Trading below it's year end fair value of $22 based on 1.63 operating E.P.S. and 5.5% long term growth.
- Average analyst 12 month target of 21.50, with favorable ratings of 4/5 by CFRA & outperform by C.S. Trefis suggests 'fair value' at 18.
- Technically the chart may also suggests a bullish cup and handle pattern.
Additional Notes:
- Alternatively I considered selling the 18/20 strangle at 30 deltas for $78 credit. This only would have used $555 buying power.
- Earnings plays are often considered like a 50/50 coin toss. At a risk 1 : win 1 ratio, the stock must remain above 17.46 by expiry.
