As central banks around the globe aggressively raised interest rates, the stock market had its second straight awful week of trading. The S&P 500 fell 4.6%, the Dow lost 4%, and the Nasdaq continued its ugly slide, falling another 5.1%.

Cabot Profit Booster Issue: September 27, 2022

Market Overview
Before we get into this week’s covered call, I want to make an adjustment to a current position.

Devon Energy (DVN) stock fell through our stop during the recent market rout. Because of the stock decline, the October 70 call that we sold for $5.55 has lost nearly all of its value.

Today we are going to buy back that call, and sell a new call, to further lower our cost basis.

To execute this trade you need to:
Buy to Close the October 70 call
Sell to Open the November 65 Call

After this adjustment, we will be long DVN stock and short the November 65 call.

Moving on …

As central banks around the globe aggressively raised interest rates, the stock market had its second straight awful week of trading. The S&P 500 fell 4.6%, the Dow lost 4%, and the Nasdaq continued its ugly slide, falling another 5.1%.

The Stock – Onsemi (ON)
Why the Strength
After more than a year of supply shortages, the U.S. semiconductor industry received the biggest boon in its history when the White House signed the CHIPS Act into law. The bill contains $52 million in subsidies for microchip manufacturers to build new capacity in the U.S. Onsemi, a leader in intelligent power and sensing technologies, said the legislation has injected “confidence” into North American manufacturing and has prompted the company to expand its own production.

Auto and industrial end markets comprise two-thirds of Onsemi’s revenue (and are expected to comprise up to three-quarters of sales by 2025), and the outlook for both sectors looks fine both near and long term. Indeed, Onsemi has inked several long-term agreements with its biggest customers in both areas while investing in new plants in the CHIPS Act’s wake.

The company also said it expects the burgeoning greentech revolution to provide a major tailwind to the company’s future growth (the firm’s components are heavily used in electric vehicle (EV) batteries and other renewable energy equipment). Meanwhile, Onsemi just launched an expansion of a silicon carbide (SiC) wafer production plant in the Czech Republic, while opening a new SiC plant in New Hampshire—both of which will dramatically lift those plants’ SiC capacity. The company’s SiC solutions are used intensively in the EV supply chain, and on this score, management expects to triple last year’s SiC revenue this year and exceed $1 billion in sales in 2023 (though that’ll still be less than 20% of the total sales tally).

On the financial front, Onsemi saw revenue increase 25% from a year ago in Q2, while per-share earnings more than doubled. Wall Street sees a slowdown next year, but the future after that looks bright and the valuation here (14x earnings) is certainly reasonable.

Technical Analysis
ON has struggled at times since the market top, but net-net, the performance has been impressive—the stock was around 64 when the Nasdaq topped back in November of last year, and today it’s hovering near the same level despite that index being down 33% from its peak. The stock recently ran all to way to new highs before the latest dip, which has gotten a bit ugly with the market in the past few days—but ON is still holding the 200-day line, selling volume has been just average and there should be support nearby as shares back in the middle of their range. Stop — 55 (please note, this stop level is below Mike’s recommendation as we are selling a high-premium call, which drops our breakeven significantly)

The Covered Call Trade
Buy Onsemi (ON) Stock at 65, Sell to Open October 65 Strike Calls (exp. 10/21) for $3.50, or a Net Price of 61.5 or less

Static Return: $350 per covered call (5.69%)

Breakeven: 61.5

Covered Call Return (if assigned): $350 per covered call (5.69%)

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 61.5 or less. (In this case 65 minus 3.50 = 61.5. Or another example is you could pay 64.75 for the stock and sell the call for 3.25, which also equals 61.5)

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 …

Open Positions
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 October 4, 2022.

Analyst Bio

Jacob Mintz

Jacob Mintz is a professional options trader and editor of Cabot Options Trader. Using his proprietary options scans, Jacob creates and manages positions in equities based on unusual option activity and risk/reward.

Jacob developed his proprietary system during his years as an options market maker on the floor of the Chicago Board of Options Exchange, where he ran several trading crowds for nearly 10 years.

After a successful career on the trading floor Jacob was tasked with setting up a trading desk at a top-tier options trading company, trading against the most sophisticated hedge funds and institutions in the world.

Today Jacob trades for himself, coaches and teaches about options trading, and runs our Cabot Options Trader, Cabot Options Trader Pro and Cabot Profit Booster advisories. Jacob lives in North Carolina with his wife and two kids who keep him very busy with their sports and social calendars.