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Rising Stars Trade: Write New Covered Calls on Activision Blizzard

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This article is part of our Rising Star Portfolios series. Follow all of Alex's trades on Twitter.

Our covered calls on video-game maker Activision Blizzard (Nasdaq: ATVI  ) expired worthless a couple weeks ago -- exactly what we wanted. We picked up the full premium on those options, pocketing a 3.2% yield in less than six weeks. Now, we're going to do it again.

It was my intention going in to repeat this trade as each subsequent option expired. But when our first calls expired on Aug. 20, the market's offerings just weren't very attractive. Activision's shares had sunk to the low-$11 range, and even though just the previous week had brought volatile daily swings in the market, premiums on options on Activision's stock remained stubbornly low.

The gifts of volatility
How things change in these markets! Less than two weeks later, we're able to re-establish our covered calls on Activision at an attractive premium. I'm going to write (option-speak for "sell") the October $12 calls, recently priced at $0.42 per share. Here are the potential outcomes of this trade:

  • If shares are below $12 at expiration, we simply pocket the $0.42 per share.
  • If shares are above $12 at expiration, our calls will be exercised and we will have to sell our shares at $12. We still get to keep the $0.42 premium plus the $0.38 premium we received on our first iteration of calls, so our net sell price would be $12.80, or a 7% return on our total position in just over three months.

My original thoughts on Activision haven't changed (for a primer on those thoughts, check out my original trade alert). Just like last time, either of these outcomes would be fine by me, which is why this strategy makes sense for my portfolio. Only make this trade if you can say the same -- with Activision's stock price currently around $11.80, there is a real chance that our shares will be called away in October (assuming we don't roll the calls).

As per our Rising Star trading rules, I'll be making this trade in my portfolio 24 hours after this trade alert is published.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios) here. 

Fool analyst Alex Pape does not own shares of any company mentioned. The Fool owns shares of Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (1)

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  • Report this Comment On August 31, 2011, at 6:52 PM, CNQFool wrote:

    Makes me feel good that I had this exact idea on my own. I have been trading for less then a month in which time I can say I have been hopelessly obsessed with researching trading, investing, option selling and every bit of information regarding the market that I can possibly absorb.

    I find myself leaning more and more toward option trading right now however I am still waiting for options to be enabled in my account. Hopefully next week I will be able to start capitalizing.

    I made my first buy on August 8th with my TFSA and so far I have spent nearly $500 on brokerage fees (Ouch) and I made one terrible trade which served as a good learning experience. All and all of my $15000 original investment I currently sit at $14800 which I think is not so bad all things considered.

    ATVI happens to be my most profitable trade to date and is currently up about 11% since purchase on Aug 15th.

  • Report this Comment On September 01, 2011, at 11:37 AM, dandles2020 wrote:

    October is Blizzcon! New expansion will be announced, possibly news about their new MMORPG Titan and a release date for Diablo (yeah right).

    I find the price usually hits 12 right around the time of the convention, especially with Call of Duty coming out in November, but ... we'll see.

  • Report this Comment On September 01, 2011, at 4:12 PM, meatmann50 wrote:

    @cnqfool,At that rate of investing you will be broke in around 7yrs.......Be carefull..You really need to read and educate yourself on investing.

    Start with the Motley fool investment guide.You'll be glad you did.

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