Monday, October 31, 2016

LLY What is going on with Eli Lilly - capitalize with call options

Drug stocks are down.  A few call options are looking interesting.  What is going on with Lilly?

Simply look at these three calls and you can see the call buyers are interested in Lilly.  Compared with Bristol (BMY) or Merck (MRK) the LLY calls are much better.

I can't buy LLY as a Dividend Machine because their revenues have not grown over the past 3 years and their dividend is solid but dividend growth is weak.  Debt to equity is okay at .59 and EPS are greater than dividends paid out.  Also, this is a solid company that basically built Indianapolis.

Three LLY Covered Calls

Each one of these calls has an expiration of January 20, 2016. 

Each one of these calls exceeds my criteria for covered call writing (also known as covered call selling.)  I expect at least a 10% return should my shares get called away.  I want the dividend and that means the expiration date needs to be after the next ex-dividend date which  in this case is November 10.  By the way, you need to own this stock before the ex-dividend date to get the dividend.  The call premium needs to be no less than 1% of my basis.

Strike Price $80



Strike Price $82.50



Strike Price $85.00



Total return, should the stock be called away, is best at the $85.00 strike price; over 17% in under 90 days.   Total return includes the gain in the shares from $73.84 to $85 plus the dividend of  $.51 plus the call premium of $1.50.

Income yield is best with the $80 call.   Basis is $73.84 and income is $.51 dividend and $2.70 call premium for income of $3.21 for a 90 day yield of 4.34%.

As an income investor I am going with the lower call and bigger income. I don't really want to own Lilly until it really gets it's growth act in order.   When I establish a position in LLY , I have to realize I could be stuck with this stock if the call buyer is wrong.

Remember that 90% of calls expire.   If I get stuck with LLY when the call expires and the price is lower than my basis, I at least get paid to wait through the dividend.  Plus, if the call buyers like the future, they may again buy my call and provide me with income.    I pocket the dividend and call premium and get stuck with a stock that will pay me more than I can get in any other safe investment. I am willing to take this risk.

M* MoneyMadam

Expect to buy LLY and sell $80 calls expiring in Jan, 2017