Stock Options To The Rescue! Papa John’s (PZZA)
Today we’re looking at an options trade on Papa John’s to increase your profits, reduce your risk, and generate some cash after the stock jumped higher.
Here’s what happened…
Papa John’s International (PZZA) shares soared more than 20% from $39.50 to a high of $47.72 yesterday. The company’s quarterly revenue and earnings beat estimates and their forecast for the rest of the year was better than Wall Street expectations.
Here’s the deal…
The pizza delivery company reported quarterly earnings of $0.79 per share. Excluding a one off marketing incentive contribution, earnings were up 23% from last year and $0.24 per share better than expected.
The strong results were driven by strong growth in international same store sales. In stores that have been open for at least one year, North American sales increased 1.1% while international stores increased 8.4%.
Additionally, management increased their full year guidance from $2.33 to $2.43 to a range of $2.40 to $2.50.
Here’s the kicker…
PZZA had a fantastic quarter… who doesn’t love pizza?
Their business is growing strong on all fronts. And the amount of free cash flow they’re generating is soaring. In the first quarter, Papa John’s increased free cash flow 72% to more than $37 million.
The more free cash flow they’re generate the more cash they have for discretionary investments. And management has done a good job of delivering shareholder value with discretionary investments like their share repurchase program.
What’s more, the stock is now at an all-time high.
Obviously, anyone who bought the stock before earnings is sitting on some hefty profits.
Here’s the problem…
At this point, the good news is already priced into the stock. I think PZZA will have a hard time making new highs in the next few months. But that’s no reason to cut a great stock like PZZA loose.
Here’s what to do now…
Let’s assume you bought 100 shares of PZZA at $40 before earnings. You’re sitting on a solid 18% profit. But with the stock at an all-time high, let’s go ahead and sell a covered call against your stock position.
Selling the PZZA July 2012 $47 call option for $2.90 is a great way to generate some additional income and give you some downside protection.
Remember, when selling call options, you immediately collect the premium. In this case, it’s $290. That’s a solid 6% of the stock price for an at the money option.
If PZZA is above $47 in July, your 100 shares of PZZA will be called away or sold at $47. You’re out of the stock with a $700 gain on the stock plus the $290 option premium. That’s good enough for a solid 24% profit.
However, if PZZA is below $47 when the option expires in July, the call expires worthless and you keep the stock and the 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, reduce your risk, and generate a stream of income.
Good Investing,
Corey Williams
Category: Stock Options To The Rescue!
