Here Are 2 'Stocking Stuffers' for Covered Call Aficionados

Last Friday was options expiration day. That meant a couple of things. First, the cash allocation in my personal portfolio surged to approximately 30% of its value as covered calls I initiated primarily during the March selloff expired in the money. It also meant I spent Monday and Tuesday selling new calls against the few holdings whose options expired that were not assigned away from me. At this point, I have very little in my portfolio that is 'naked'. As I have noted many times recently, I believe we are overdue for at least a bout of profit taking after this massive rally, if not a more significant decline in the overall market. That is not to say I am not still actioning individual opportunities as they present themselves. I am doing so using the same covered call strategy that has worked so well for me throughout 2020. I added some exposure to my stake in UniQure using this strategy this week. The shares plunged nearly 20% at one point on Monday as the FDA put a clinical hold on a pivotal Phase study for its Hemophilia B gene therapy. The hold was in response to one member of the study group developing liver cancer. However, if you dig farther under the surface you find that this particular individual had several traits that made liver cancer much more likely. I expect the hold with the FDA to be resolved efficiently. The company also sold the rights to this therapy for a $450 million upfront payment along with significant potential milestone payouts and royalties in spring of this year, lowering the risk to the firm somewhat around the development of this compound. Seven analyst firms including Jefferies and RBC Capital have reissued Buy ratings after this news broke this week as well. I used the July $40 call strikes to add to my holdings within some new covered call positions. This strategy provided me with an additional 25% of downside protection even after the decline, and a potential return of just under 35% even if the stock does little over the next seven months. I also initiated a new position in Lexicon Pharmaceuticals using this simple option strategy earlier this week. Few biotech stocks have destroyed more shareholder value than Lexicon over the past few years. The company's main asset is Sotagliflozin. This compound is an oral dual inhibitor of two proteins responsible for glucose regulation called sodium-glucose co- transporter types 1 and 2. Thus far, the drug has been approved in the European Union for use as an adjunct to insulin therapy to improve blood sugar control in some patients but has not yet been commercially launched there. The company recently posted positive trial results that hopefully will lead to U.S. approval sometime in 2021. Lexicon has three other compounds in earlier stage development. One of which, LX9211, just entered into a collaboration deal to speed development. Lexicon has also cleaned up its capital structure recently and the shares saw some insider buying in September by several officers including its CEO. This is not a stock I want to hold straight equity in. However, using the July $4 call strikes I was able to take a stake in the firm via covered calls that provided nearly 40% of downside protection, and nearly 90% of potential upside. Now that is a risk/reward scenario I am more than happy to take advantage of even in a name that has provided plenty of disappointment to its long-term shareholders over the years. And those are two 'stocking stuffers' for those covered call aficionados in the Real Money Pro community before Christmas this Friday.

Here Are 2 'Stocking Stuffers' for Covered Call Aficionados

I added to my stake in UniQure and initiated a new position in Lexicon Pharmaceuticals.

Columnist Conversation

This Weekend on Real Money

How Apple, Amazon, Microsoft, Google and Facebook Can Keep Their Mojo

Thursday Morning Fibocall for 6/10/2021

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.