Market Overview
Before we dive into this week’s covered call idea, I wanted to talk about, and adjust, three of our positions coming out of October expiration.
First, ON Semiconductor (ON) stock closed above our 65 strike on Friday, which means we no longer have a stock or option position, and walked away with our profit of $427 per covered call, or a yield of 7.03%.
Next up, we are going to continue to sell calls against our Academy Sports & Outdoors (ASO) and Las Vegas Sands (LVS) stock positions as the original call sales buffered our positions from losses, I’m becoming more encouraged by the market, and the November call prices are attractive to sell.
To execute these trades you need to:
Sell to Open the LVS November 39 Call (exp. 11/18)
Sell to Open the ASO November 46 Call (exp. 11/18).
Moving on …
Maybe, just maybe, last week was the start of a fourth quarter market run, as the S&P 500 gained 4.75%, the Dow rose 4.9%, and the Nasdaq added 5.22%.
This week earnings season really gets in gear … buckle up, and be prepared to jump into some earnings season winners in the weeks to come.
The Stock – Steel Dynamics (STLD)
Why the Strength
Despite hot-rolled steel prices being 60% below their highs from last year, demand for the building material remains strong, which is keeping Steel Dynamics’ business in fifth gear.
The company, which is one of America’s largest producers of carbon steel, reported surprisingly upbeat results for Q3 last week: Strength in the firm’s steel fabrication business “meaningfully” offset lower sales from its flat-rolled operations, with total steel shipments hitting a quarterly record of 3.2 million tons, thanks to steady steel demand from the construction industry and complemented by the automotive, industrial and energy sectors.
The firm also reported records in steel fabrication operating income (bolstered by higher prices) and shipments, as well as record cash flow from operations of $1.5 billion (up 138%). Total revenue of $5.7 billion improved 11% from a year ago, while per-share earnings of $5.46 beat estimates by 5%.
Management said customer order activity continues to be “healthy” across all business segments, but expects seasonally moderated volume for steel and metals recycling operations in the coming months. However, it also sees strength down the road, with both input costs and competitive imports expected to fade—in turn supporting steady-to-expanding metal margins. Moreover, the company’s steel fabrication operations order backlog is “historically high” (stretching well into 2023). Coupled with recently announced expansion initiatives, these are expected to be “firm drivers” for Steel Dynamics’ bottom line in the coming years.
Earnings should slip next year, but remain elevated, and even those estimates are moving much higher—to north of $11 per share today from $9.60 three months ago.
Technical Analysis
Like most commodity names, trading action in STLD has been extremely choppy in recent months. The stock hit a peak near 100 in April, then plunged 38% before bottoming in early July. A strong rebound into August followed, but shares were unable to recover to the April high, stopping short around 89 and resulting in another big drop, this time to 70. The move higher in October definitely has more power, though, helped along by the end-of-week rush of buying after earnings. Stop — 79
The Covered Call Trade
Buy Steel Dynamics (STLD) Stock at 96, Sell to Open November 95 Strike Calls (exp. 11/18) for $5, or a Net Price of 91 or less
Static Return: $400 per covered call (4.39%)
Breakeven: 91
Covered Call Return (if assigned): $400 per covered call (4.39%)
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 91 or less. (In this case 96 minus 5 = 91. Or another example is you could pay 95.5 for the stock and sell the call for 4.50, which also equals 91)
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 November 1, 2022.
