Thursday, May 22, 2014

Using Covered Calls to make money with WWE stock

The last few months have been crazy for shareholders of World Wrestling Entertainment Inc. (WWE). The company's stock reached almost $32 a share on news of revenue from a TV deal and their own online streaming subscription channel. I first noticed the movement because on Stocktwits.com there was abnormal volume. As of earlier this week May 20th, 2014 the stock was all the way down to $11 on news that disappointed on the T.V. deal and the amount of people subbed to their online streaming channel. Some see this as an outstanding opportunity and others think the stock will keep going lower. I have some free cash I wanted to put to work and found a way to have limited losses with the opportunity for a nice gain. I purchased 200 shares of the company at $11 with commission the total was $2206.95. I then sold July 19th covered calls at the $10 strike price for $1.65 or $165 per 100 shares. WWE will also have a dividend payment the ex-dividend date is June 11th for .12 a quarter or .48 a year for a 4.3% yield. With the $1.65 from the covered call and .12 from the dividend that is a total of $1.77 a share minus the $1 from the $10 strike price so .77 per one 100 shares profit. Below are the possible scenarios if the price goes up, stays the same, or decreases in value.


Scenario 1: Stock price goes up

Purchase price 200 shares for $2200 + commission $6.95 = $2206.95
Option price $10 July 19 strike $165 x 2 = $330 - 8.45 com 2 options = $321.55
Dividends collected $12 per 100 shares = $24
Total 200 shares @ $10 = $2000 + $321.55 + $24 - $20 commission on sale = $2325.55
Profit $2325.55-$2206.95 = $118.60 / 2206.95 = 5.4% profit in 2 months

Scenario 2: Stock price goes down under $10 strike to $9.90 as share

Purchase price 200 shares for $2200 + com $6.95 = $2206.95
Option price $10 July 19th strike $165 x 2 = $330 - 8.45 com 2 options = $321.55
Dividends collected $12 per 100 shares = $24
Total 200 shares @ $9.90 = $1980 + $321.55 + $24 = $2325.55
Profit is $118.60 for a 5.4% and we still own the shares to write another covered call or sell. The average cost per share went from $11 down to $9.31 a share with shares sitting at $9.90 a share. A new yield on cost on the dividend of 5.1%

Scenario 3: The stock price drops below the Break-even point of what was received from the Dividend and Cover Call.  Lets say $9.35 a share which would be 15% decline from the purchase price. 

Purchase price 200 shares for $2200 + com $6.95 = $2206.95
Option price $10 July 19th strike $165 x 2 = $330 - 8.45 com 2 options = $321.55
Dividends collected $12 per 100 shares = $24
Total 200 shares @ $9.35 = $1870 + $321.55 + $24 = $2215.55
Profit is $8.60. This is the break even point, if shares fall we will be forced to make a choice to keep or cut loose. I do think the dividend would be safe and .48/$9.35 = 5.1% dividend yield on cost.


Overall I like the risk/reward factor and the potential yield on cost even if the stock does fall lower. WWE has a good history of paying a dividend. The company isn't in trouble just didn't meet the absurd expectations. The key will be getting more subs to cover paid per/view revenue.  I will keep everyone posted on this trade and position. Let me know what you think!

Thanks
DSF

Disclaimer: This is a personal weblog. The opinions expressed here are my own. All data and information provided on this site is for informational purposes only. Please do your own research before investing.


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