Before we dive into this week’s idea, let’s close the books on our August covered call trades.
Here are the trades that expired for full profits:
CFLT - $280 profit per covered call, or a yield of 9.58%
FTI - $115 profit per covered call, or a yield of 7.25%
NE - $170 profit per covered call, or a yield of 3.92%.
Next up are the stock positions in trades that were not closed on Friday …
We have been selling calls against our LVS stock position for three months. And while the call premiums have lowered our cost basis on our stock position, the stock has broken down, and we are going to move on.
To execute this trade you need to:
Sell LVS stock position.
UAL is a bit tougher as the stock has been bouncing above and below our stop level. Let’s give this trade a bit more time by selling a new call.
To execute this trade you need to:
Sell to Open the UAL September 52 Call for $0.85 (approximately).
Moving on …
It was another rough week for the bulls as the bond market and China worries continue to weigh on the indexes. By week’s end the S&P 500 and Dow had both lost 2.22%, while the Nasdaq declined by 2.6%.
This week could be interesting as the long-awaited Fed Chairman speech at Jackson Hole could potentially set the stage for more market volatility.
The Stock – Vertiv Holdings (VRT)
Why the Strength
Vertiv Holdings is one of the market’s fresher leaders that most have never heard of. The company has always done good business in data center infrastructure, and now it looks like a classic picks-and-shovels player in the coming AI wars. It supplies all sorts of wares to its clients, though a big driver seems to be thermal solutions (it says it has the widest portfolio of solutions in the industry), keeping all of the newer, more powerful technology (all of which produces greater amount of heat than before) at the right temperature so that performance is optimal.
That should be a huge opportunity as AI means a greater amount of powerful IT equipment is needed, and Vertiv is a key player both in traditional air cooling and also in liquid cooling solutions, which supposedly do an even better job.
As for the business itself, it’s been subject to continuing supply chain issues, but those are easing (one of the reasons margins and earnings have busted loose on the upside), and investors are thinking business is set to accelerate as the AI buildout gets underway. As it stands now, growth is picking up a bit (organic sales up 20% in the latest quarter), management is boosting estimates and the valuation (22 times this year’s estimates, which are likely conservative) helps the cause—and, again, all of that is before much of an AI-related boost, with the top brass saying in the latest conference call that it’s already having discussions with clients that want to make sure they can secure supply down the road. We like it.
VRT imploded during the bear with everything else, and really wasn’t looking like a new leader through April. But the AI boomlet changed everything, with the stock completely changing character—shares immediately ran up 10 weeks in a row and actually pushed a bit higher after that. And then VRT went wild again, gapping up on Q2 earnings and, so far, has held most of the move. Stop — 27.5
The Covered Call Trade
Buy Vertiv Holdings (VRT) Stock at 35, Sell to Open September 35 Strike Calls (exp. 9/15) for $1.50, or a Net Price of 33.5 or less
Static Return: $150 per covered call (4.47%)
Covered Call Return (if assigned): $150 per covered call (4.47%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 33.5 or less. (In this case 35 minus 1.50 = 33.5. Or another example is you could pay 35.25 for the stock and sell the call for 1.75, which also equals 33.5)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.
The next Cabot Profit Booster issue will be published on August 29, 2023.