Order Of Magnitude

The third week of the month is usually crazy, when short term pressures overwhelm logic and reason.  Our weekly scan produced an interesting gem: ProLogis.  Being as options expire this week, we found the bid/ask spread for the in-the-money $12.50 calls to be a bit out of the ordinary.  Examining the Equivolume:

It would appear that this REIT has been going for a bit of a run and big volume appears on the right kind of days.

Now for the 50-50.  We have an upward moving stock, that is due for a pullback, and in 5 trading days the options expire.  PLD has a 15 trading session average true range of $1.75, which is pretty large for a stock holding the Friday's end of day price of: $14.12. Yes, 12% of current trading price.

Now, if a covered call position could be entered under these conditions, you would lay out $1412 for 100 PLD shares, and then sell a single covered call at $12.50 strike for $2.50 a share, or $250 total.  If the price falls below the strike in the next 5 days, your cost basis is $10/share to offload, so we'll have a still profitable stop at $11.75 to exit the position.  If the equity remains above $12.50 until Friday, you'll get called away, along with all the fees that produces.  The only thing you get to take home is the premium.

So let's say your broker lets has a $10/transaction fee (hopefully you can do better).  Your initial outlay is $1412 (equity) + $10 (commision) - $250 (option premium) + $10 (another commision) = $1182 (total expenses).  You get called away, so you sell your stock for $1250 (minus $10 again, that broker!), and take home $1240.  That mean $68 dollars in your pocket, after fees, on an outlay of cash equal to $1182 (you'll lose way more in buying power) in 5 days, if the shares stay above $12.50. If they go under, get out, and keep whatever premium erosion you have accumulated at that point. So on the upside you can get 5.7% on your money in 5 days, and there is safety net down to $10 before you start to lose money.

If your greedy, or want to take on more risk.  The February call options have high volatility priced in.  Have a look at our premium chart:

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