06/18/13 Covered Call Pick: CBOE Holdings, Inc. (CBOE)

CBOE Holdings Inc. (CBOE) operates a global option exchange in Chicago, Illinois. Established in 1973, and converted to a publicly traded company in 2010, the CBOE meshes open outcry methods and an electronic platform to create a single options and futures market that is the largest U.S. options exchange, dealing in contracts on over 2,200 companies, 22 stock indices, and 140 ETFs.

CBOE Holdings has a market capitalization of $3.80 billion with 87.3 million outstanding shares.

CBOE currently pays a $0.15 dividend for a current yield of 1.4%.

With a beta of 0.68, CBOE trades with approximately 30% less volatility than the current market.

Most people are unaware that the stock exchanges are publicly traded and can be invested in just like any other publicly traded company. Nearly all of you reading this blog that have actually instituted some of the writes we have recommended in our strategies, have had that Options order routed through the CBOE hub in Chicago. Investment derivatives such as Options have become more and more popular over the past few years - this blog and the fact you are reading it are good examples of that. An interest in Options strategies like the Covered Call Strategy, combined with the positive markets (which help drive interest in buying and selling Options) have helped boost CBOE's stock over the last two years. The stock gained 13% in 2012 and over 43% YTD on the back of large increases in orders on VIX and S&P 500 Options.

With the run up in the stock we have to look at the valuation of the stock. The P/E ratio is currently sitting at 24, which is a bit high, but sits in the middle of its 5-year P/E Range. It's Forward P/E based on 2013 earnings is 22, off of a 17% expected increase in earnings for the year. This comes out to a PEG ratio of 1.4. With this data we can come to the conclusion that while the stock is not cheap, it is not outrageously overpriced. This is a good sign considering the stock's recent rise and the fact there are plenty of valuations that are getting stretched in the market.

The stock's Relative Strength line, a measure of a stock's performance against the S&P 500, has been flat or rising for the past eight months, indicating it has been performing at least as well as the index, and better than the index in most cases. This combines with an Up-Down ratio of 1.9 to create a lot of positive support for the stock. The stock is in the IBD 50, a list of 50 top stocks for the week marked for strong growth, is currently in IBD's "buy zone", and carries a 99 IBD composite rating, meaning it outperformed 99% of all stocks.

For a Covered Call Strategy on the stock, we're looking at an out-of-the-money Call due to the bullish reasons stated so far. That is why we are looking to buy CBOE and sell the December 2013 $46 Call.



Scenario:

  • Buy 100 shares of CBOE @ $43.69 = $4,369 + Commission ($12.95) = $4,381.95
  • Write 1 CBOE December 2013 $46 Call @ $150 - Commission ($8.70) = $141.30

Note: Prices may vary from the time of post. Actual commissions paid will vary returns. 


Static Return (Not Called):

(Call + Dividend)/Stock Price   X    (Days/Year)/Days to Expiration

(1.41 + (2 * 0.15))/43.82      X    (365)/186

7.66% Static Return


If-Called Return:

(Call + Dividend + Strike Price - Stock Price)/Stock Price       X        (Days/Year)/Days to Expiration

(1.41 + (2 * 0.15) + 46 - 43.82)/43.82       X      (365)/186

17.42% If-Called Return



Disclosure: Clients and/or principles of OakTree Investment Advisors may or will have an investment in the above positions, but only on the the same sides of the trades. The above numbers are analytic estimations based on information known at the time of this post. OakTree Investment Advisors does not guarentee the above, or any, result. All investment decisions should be made based upon individual’s personal investment goals and risk tolerance.

 

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