Trade Alert: Sell USB calls
Sell USB November 19th $60 calls at $2.30 or better
Expiration date: November 19th
Strike price: $60
Call price: $2.30
U.S. Bancorp (USB)These calls are very slightly in-the-money. I do like the prospects for USB over the remainder of the year, as I believe longer-term interest rates will trend higher and thus increase the bank’s net interest income profits. But the market looks dangerous in the near term.
Despite the increasingly volatile market and growing near term risks, U.S. Bancorp is rallying. The reason is the announcement of the purchase of Mitsubishi UFJ Financial Group (MUFG) for $8 billion. It will enhance the bank’s West Coast presence and the market seems to like the deal, as the stock is up in a down market.
The stock is at a three-month high on recent news and I want to use the current strength to lock in a high income.
Here are the three scenarios.
- The stock closes above the $60 strike price at expiration
Call premium: $2.30
Dividends: $1.36 (4-15, 7-15, 10-15)
Appreciation: $6.53 ($60.00 strike price minus $53.47 purchase price)
Total: $10.19 (total return will be 19% in eight months)
- The stock price closes below our $60 strike price.
Call premium: $2.30
Dividends: $1.36
Total: $3.66 (total income return of 6.8% in eight months)
- The stock price declines.
The decline will be offset by the $3.66 in income. Of course, the stock price may still be above the original 53.47 per share purchase price.
