You could call this strategy an "options LITE" trade.
The name is Lumentum Holdings Inc. (LITE) , a reasonably valued communications equipment company. And the trade strategy I'll get to further down.
LITE's current trading levels appear near the floor. Options against the equity provide solid liquidity and acceptable returns.
Lumentum designs and manufactures lasers and other optical components. Its products are found in nearly every type of telecom, enterprise, and data center network and its lasers are used used to advance manufacturing techniques and applications such as next-generation 3D-sensing capabilities.
The company, like almost every other manufacturer, has been challenged throughout the last year with global supply chain issues, particularly in acquiring enough chips used by its product portfolio to meet demand. This has meant lower margins and is likely to result in an approximate 15% drop in profits in this fiscal year, which ends on June 30, even on sales growth in the mid-teens.
Earnings per share should "trough" this fiscal year at just under $5.20 a share before rebounding to nearly six bucks a share next fiscal year on 10% revenue growth, according to the current analyst firm consensus. China finally fully reopening should help dissipate supply chain issues throughout 2023. The company will also have time to gain synergies from its recent $900 million purchase of NeoPhotonics.
In addition, after a 40% decline from recent highs, the stock appears to trying to form a floor around current trading levels. The company's balance sheet is in good shape with approximately $1.6 billion of cash and marketable securities against around $1.9 billion in long term debt. Lumentum Holdings has been aggressive in using its cash flow to buy back stock and has purchased over $800 million worth of its own equity over the past six quarters.
It does feel the worse is likely behind this name and the stock is not expensive, given its growth prospects at 10 times next fiscal year's projected earnings. By using a covered-call strategy, an investor can make a decent return even if the stock trades sideways until the end of the company's fiscal year.
To establish an initial position in LITE using a covered call strategy, do the following: Selecting the June $60 call strikes, fashion a covered call order with a net debit in the $53.90 to $54.10 a share range (net stock price - option premium). This strategy provides downside protection of approximately 10% and 11% of upside potential even if this stock does nothing over the less than five month option duration.