Dynatrace was Monday's IBD Stock of the Day and also is in IBD Leaderboard.
DT stock is pulling back after a strong rally, but still sits above the 50- and 200-day moving averages.
According to the IBD Stock Checkup, DT stock is ranked No. 1 in its industry group and has a Composite Rating of 99, an EPS Rating of 99 and a Relative Strength Rating of 91.
A covered call strategy is one way to slightly reduce the risk on a long stock position while also generating some premium. The catch is that upside is limited above the covered call strike.
Let's look at how a covered call trade on DT stock might take shape.
Buying 100 shares of Dynatrace would cost around $5,000.
An Aug. 18, 55-strike call option was trading Monday around $1.25, generating $125 in premium per contract.
Return Of 2.56%, Or 17% Annualized
Selling the call option generates an income of 2.56% in just under two months, equaling around 17% annualized.
If DT stock closes above 55 on the expiration date, the shares will be called away at 55, leaving the trader with a total profit of $620. (That's the gain on the shares plus the $125 option premium received.)
That equates to a 12.70% return, which is 87.50% on an annualized basis.
Of course, the risk with the trade is that DT stock might drop. That could wipe out any gains made from selling the call.
Trade Generates Income On DT Stock
Covered calls can be an effective strategy for generating income, managing downside risk, and reducing the effective purchase price of a stock.
Please remember that options are risky, and investors can lose 100% of their investment.
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This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
