Trade Update – $SO: Closing BuyWrite for a Gain

by CC August 12, 2015 1:03 pm • Commentary

Back on May 12th (read here) we took a contrarian view on beaten up utility Southern Company (SO). Here was the trade & rationale:  

For those who think the stock should find support back near $42, and think the bond move is getting a bit overdone, and rate sensitive stocks like SO could be near a period of stabilization, call sales are attractive against long stock as a yield enhancement.

New Trade: Long 100 shares of SO at $43.45 and short 1 Aug 45 call at .52

create an additional 1.2% yield to the upside, with a call-away level of $45.52, up 4.8%, while creating a 1.2% buffer to the downside, in addition to the two 54 cent dividends to be paid, one in early June and one in early August creating a $1.08 buffer.

Now the stock is $46.55, representing a gain of $3.10 (plus the 54 cent dividend paid n June 6th) and the Aug 45 call is offered at $1.55.  So we have a gain of $3.64 on the stock and dividend, and a loss of 1.03 on the call, resulting in a gain of $2.61, or 6% in 3 months. Not bad.  We are going to close this position by selling the stock and buying to close the call.

Action: Sell to close 100 shares of SO at $46.55, buy to close 1 Aug 45 call for 1.55