Making 5% monthly on Sears Holding if you are Bullish on SHLD

Making 5% monthly is opportunity not presented very often. But you may find this type of opportunities at times and not a bad Idea to analyze and make use of them.

The opportunity

Stocks of Sears Holding (SHLD) have been hit pretty hard in the past 2 months, declining from the $60-70 level down to $40-45 range, a drop of almost 35%. (See below the graph of Sears Holding for last 12 months)

It seems like investors have lost confidence in Sears Holdings and are dumping the stock. The Stocks had lost last year after the Holiday shopping season when Sears had very few deals for the customers and lost a big share of Holiday Sales to the competitors.

The stocks lost more than 25% in less than a month and the market capitalization has been reduced to 4.5 Bn. The Balance Sheet of the Company has more than 10 Bn in Capital Surplus and has spent more than 5 Bn. dollars to buy back its shares in Treasury Stock.

The company surely had issues last year where it could not meet up the Analysts expectation on the Sales and the stock took a deep dive in January.

If someone has analyzed the offers that Sears had this year compared to last year, you would see that they had increased their offers significantly this year which would give them a big boost in their top line and bottom line this year.

They have recently hit their 9 months low and currently the stock is hovering around $40.

Opportunity in Sears Holdings

The stock is currently trading at $42.26 as of Dec 13^th 2012. Since the Stock is on the lower side of the 52 Weeks range, there is significant premium on the CALL Options for the stock.

Potential Trade

Trade: Buy stocks of Sears Holdings at $42.26 and sell the CALL Option for $3.30 for Jan 18^th, 2013 Strike Price of $41.42. This trade is called Covered Call. You can run this trade also if you are long term Bullish on SHLD or currently hold the stock.

Payout of the Trade

There are 3 scenarios that can happen on the day of expiration on Jan 18^th, 2013.

The breakeven for this trade is $38.96 (excluding opportunity cost and trading commissions)

1. Stock price of Sears Holdings > $41.42: The stock will be called and you will be obligated to sell the stock at the Strike Price of $41.42. You will still make $2.46 ($42.26(buy price) - $41.42(strike price) + $3.30 (premium)) excluding brokerage.

2. Stock price of Sears Holdings < $41.42 but >$38.96: The premium will be all yours to keep and you also own the stock. If you want you can sell the stock to book the profit. The other Option is to sell the calls for another month and collect more premiums.

3. Stock price of Sears Holdings < $38.96: The premium will be all yours to keep and you also own the stock. But theoretically you have made a loss in the trade because the decline in the value of the stock is more than the premium you received to own the stock. In this situation, I recommend to keep a watch as the stock price declines and close the covered call position with the Stop Limit order.

The good part of this trade is that you are selling in the Money calls. So the Stock has to decline by more than 7% before you incur any loss. Also, even if the stock declines by 2%, you still make 5% on your investment.

My Position:

I had Stocks and Sold Calls for Dec 14^th Expiration which ended in the money and the stock will be called. I am planning to take position again next week to play the trade…