Stock Options To The Rescue! Red Hat (RHT)

| April 5, 2012 | 0 Comments

Red Hat (RHT)Here’s what happened…

Red Hat (RHT) shares popped 18% higher after its revenue, earnings, and outlook beat Wall Street expectations.

Here’s the deal…

The open source software company reported outstanding fourth-quarter earnings.  They made 29 cents per share.  This beat the 27 cents Wall Street analysts were expecting.

And revenue soared past expectations as well.  RHT reported $297 million versus the consensus of $291 million.

Management also gave upbeat guidance for 2013.  They’re now expecting revenue in the neighborhood of about $1.35 billion.  And the shares are now at a ten-year high.

Here’s the kicker…

Demand for their Linux based products is strong.  They closed five deals worth more than $5 million apiece last quarter.  According to CFO Charlie Peters, “We experienced a significant increase in large deals both in the Q4 and for the full year.”

And to top it off, they announced a $300 million share repurchase program.

Here’s what to do now…

I’m bullish on Red Hat long term.  But shares of RHT are already pricing in a great 2013.  And at a recent price of $60.67, the stock’s already at its highest price since the dot com bubble burst.

In other words, it’s going to take a lot to move the stock higher from here.  If RHT follows similar surges like it did in the past, it’s likely in store for a long period of consolidation or sideways trade.

If you own at least 100 shares of RHT, this looks like a perfect opportunity to sell covered calls.  It gives you the opportunity to squeeze a little more money out of your existing position.

Take a look at selling the RHT June 2012 $62.50 calls for $2.65.  Each contract you sell will give you $2,650.  Remember, you can sell one contract for every 100 shares you own.

You can collect the option premium now.  And if the stock never hits $62.50 before June 16th, the option premium is yours to keep and you’ll still own the stock.

However, if the stock hits $62.50, your shares will likely be called away or sold.  But selling the stock at $62.50 is $1.83 more per share than if you just sold the stock today.  And when combined with the option premium you receive, you will juice up your returns by about 5% versus just selling RHT today.

Good Investing,

Corey Williams

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Category: Stock Options To The Rescue!

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.