Market Overview
Before we dive into this week’s idea, I wanted to note that CCJ broke our stop following the announcement that the company would make a large acquisition, in addition to initiating a stock offering. These two news items weighed on the stock last week.
I’m going to give this trade a bit more rope as these types of stock moves following such announcements tend to pass with time. Also, we collected a very large premium when selling an October call last month, which buffered our position from losses.
However, while I am going to give the trade more time, I am also going to adjust this trade so as to collect even more premium.
To execute this trade you need to:
Buy to Close the October 26 Call
Sell to Open the November 25 Call
After this adjustment our position will be:
Long CCJ Stock
Short November 25 Call
Moving on …
The market has had many ups and downs in recent days, though stepping back, the indexes have been trending lower. Essentially, while there have been some strong days for the indexes, we are in a bear market until proven otherwise.
Despite the soft market, the Profit Booster portfolio will continue to execute defensive covered calls in strong stocks, as the call premiums are very expensive and attractive to sell. This brings me to this week’s stock and covered call trade …
The Stock – World Wrestling Entertainment (WWE)
Why the Strength
It’s not often that investors cheer the departure of a company’s successful, long-time chairman. But that’s exactly what happened when Vince McMahon, WWE’s CEO of 40 years, stepped down in July, paving the way for a leadership change that many see as a long-term positive.
WWE, which is well known for its televised pro wrestling events, has transformed itself in recent years into a global integrated media and entertainment company, including forays into film making, American football and other businesses. But weekly televised wrestling shows are still the company’s calling card, with TV licensing deals for its flagship RAW, Smackdown, NXT and WWE Network programs accounting for more than 70% of annual revenue. Total revenue in Q2 was a record $328 million (up 24%), driven by record viewership for its premium live shows—including the annual WrestleMania event—while per-share earnings of 59 cents were up 40%.
The company also does booming business with WWE-branded merchandise, including toys and video games, which account for 13% of total sales. (Consumer products revenue of $44 million in Q2 doubled from the year-ago quarter.) Moreover, WWE just launched a new digital platform for e-commerce and licensed merchandise in connection with its long-term partner Fanatics, including physical, digital and non-fungible token (NFT) trading cards.
But the latest strength is mainly due to McMahon’s departure, which is widely viewed as a bullish move for WWE (due to his perceived mishandling of the TV product). The new management, meanwhile, has already taken big steps to increase viewership for the weekly shows. Growth won’t be amazing but could easily beat estimates; the next report is due November 3.
Technical Analysis
WWE’s post-pandemic run topped out early last year for the most part, with the 60 level (give or take) marking major resistance a few times. But the trend changed when the calendar flipped, with the stock stair-stepping higher since then, with higher lows and higher highs—and the latest buying spree (three straight weeks of above-average buying volume) keeps that pattern in place. Stop — 65
The Covered Call Trade
Buy World Wrestling Entertainment (WWE) Stock at 76, Sell to Open November 75 Strike Calls (exp. 11/18) for $4, or a Net Price of 72 or less
Static Return: $300 per covered call (4.16%)
Breakeven: 72
Covered Call Return (if assigned): $300 per covered call (4.16%)
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 72 or less. (In this case 76 minus 4 = 72. Or another example is you could pay 75.75 for the stock and sell the call for 3.75, which also equals 72)
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 25, 2022.
