Coming out of September expiration our PLTR and FRPT covered calls that we sold last month expired worthless (good). Today, let’s sell new calls against those stock positions to again create yield and lower our cost basis.
To execute these trades you need to:
Sell to Open the PLTR October 16.5 calls (exp. 10/20) for $0.45 (approximately)
And
Sell to Open the FRPT October 75 calls (exp. 10/20) for $1.90 (approximately)
Moving on to this week’s covered call idea …
It was a fairly quiet week in terms of the leading indexes’ performance as the S&P 500 fell marginally, the Dow mostly finished the week unchanged, and the Nasdaq fell by 0.4%.
This week brings a Federal Reserve announcement that could potentially spark a more exciting week of market volatility.
The Stock – Dell (DELL)
Why the Strength
At first glance, info tech giant Dell’s fiscal 2024 second quarter (ended August 4) was a mixed bag and by some measures even a disappointment—revenue of $23 billion was down 13% from last year’s Q2, while per-share earnings of $1.74 increased by only 4%, though they did beat estimates by 60 cents (more than 50%). Moreover, the firm’s Infrastructure Solutions segment sales declined 11% and the Client Solutions segment saw a 16% drop in revenue, as Dell’s PC and laptop market is still working through excess inventory, while the cloud computing market also faced headwinds. So why is the stock acting terrifically?
Because of the eye-popping performance of the company’s artificial intelligence-related server business. Strength was particularly seen in the recently unveiled PowerEdge XE9680 server powered by Nvidia graphics processing units (GPUs) and designed for high-performance applications targeting the AI field (the product also boasts a $2 billion-plus order backlog and is the “fastest ramping new solution” in Dell’s history). Storage revenue, meanwhile, improved substantially on continued demand growth in PowerStore, Dell’s leading midrange storage array, and PowerFlex, the company’s proprietary software-defined storage (which has grown eight consecutive quarters with Q2 demand more than doubling year-on-year). Indeed, AI was a star attraction for Dell in the quarter as management said it represented 20% of total server revenue, or around $860 million in AI sales.
The sanguine results (and a very reasonable valuation) prompted several major institutions to upgrade the stock, with one of them seeing Dell’s AI servers as a significant “upside driver of revenue and EPS for several quarters” to come. Analysts see earnings bottoming out by year-end and perking up next year.
Technical Analysis
DELL bottomed last October, effectively retested its lows in March and then entered a steady, sustained uptrend, with shares marching to 56 in July. There were some small ups and downs for the next few weeks, but the result was a test of the 50-day line, which led to shares gapping up huge after the Q2 report. Stop — 59
The Covered Call Trade
Buy Dell (DELL) Stock at 70, Sell to Open October 70 Strike Calls (exp. 10/20/2023) for $2, or a Net Price of 68 or less
Static Return: $200 per covered call (2.94%)
Breakeven: 68
Covered Call Return (if assigned): $200 per covered call (2.94%)
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 68 or less. (In this case 70 minus 2 = 68. Or another example is you could pay 70.25 for the stock and sell the call for 2.25, which also equals 68)
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 September 26, 2023.
