Stock Options To The Rescue! H.J. Heinz (HNZ)
Today we’re looking at an options trade on H.J. Heinz to generate some cash after the stock dropped after reporting earnings this week.
Here’s what happened…
H.J. Heinz (HNZ) quarterly earnings beat estimates. However, their revenue was weaker than expected. And their full year forecast remained unchanged.
Here’s the deal…
HNZ hit a 52-week high of $58.31 when the CEO hinted quarterly earnings would be better than expected the day before they reported. However, the shares have fallen back to $55.88 after the full quarterly earnings report came out.
Quarterly earnings came in at 80 cents per share. It was a 14% increase from the same quarter last year. And 3 cents better than expected.
Revenue, on the other hand, came in light. HNZ had $2.79 billion in revenue but analysts were expecting $3.07 billion.
The company said they’re on track to meet their 2013 outlook of $3.52 to $3.62 a share. Here’s the kicker…
HNZ had a solid quarter. Their strong earnings are being fueled by organic sales growth. And they’re doing it in a difficult macroeconomic environment.
Unfortunately, anyone who heard the CEO drop the hint that earnings would be better than expected the day before got trapped in the stock at a much higher price.
Here’s what to do now…
Let’s assume you bought 100 shares of HNZ at $57.50 the day before earnings. Your $5,750 investment is now worth $5,588. A loss of about 3%.
It’s obviously a big disappointment to see the stock fall back after the CEO’s comments sent the stock soaring before the earnings announcement. But don’t throw in the towel… rescue HNZ with an option trade.
HNZ is still a solid stock. It pays a good dividend. But there isn’t a catalyst to send the stock price skyrocketing anytime soon. Don’t forget, this is still a consumer staple stock that makes money selling ketchup.
This looks like a great opportunity to juice up the returns by selling a covered call.
Sell the HNZ March 2013 $60 covered call for $0.90.
Remember, when selling call options, you immediately collect the premium. In this case, it’s $90. And you still own the stock so you will still collect the dividend and profit from any upside in the stock up to the strike of the call.
If HNZ is above $60 in March, your 100 shares of HNZ will be called away or sold at $60. You’re out of the stock with a $250 gain on the stock plus $154.50 in dividends and the $90 option premium. That’s good enough for a 9% profit on a defensive consumer staples stock in a matter of a few months.
However, if HNZ is below $60 when the option expires in March, the call expires worthless and you keep the stock, the $154.50 in dividends, and the $90 option premium.
Here’s the best part…
If your stock isn’t called away, then you can sell another call and collect another premium. And you can do this over and over again…
As you can see, selling a covered call against your stock holdings can increase your profits and help you turn this losing trade into a winner.
Good Investing,
Corey Williams
Category: Stock Options To The Rescue!
