Let's Play 'Small Ball' With These 2 Stocks

The Dow Jones Industrial Average just wrapped up its best month of performance since 1987. t should be noted that Apple accounts for approximately a quarter of the last 10,000-point rise on the Dow as this Big Tech has been in the vanguard of the rally off the March Covid-19 lows. Still, the breadth of the rally has widened significantly since the election. The small cap Russell 2000 just delivered its best month of performance since its inception in 1984. As I highlighted in my article Monday, equities seem to be getting further overbought by the day. I am using these rallies to raise additional cash in my portfolio, and I believe the chances of a buyable dip before the end of the first quarter are high. The limited funds I am recycling back into the market are being positioned via covered call orders. This simple option strategy provides decent downside protection and on small-cap names, especially in biotech, can deliver lucrative potential returns. Right now, however, with the market so elevated I am focusing mostly on well-known names that have less volatility than their smaller cap brethren. I am happy to trade more limited returns for lower beta right now. Today, we take a quick look at two of the names I have recently taken stakes in using covered call strategies utilizing long-dated call strikes just outside the money. Both of these stocks have navigated the pandemic quite well despite negative impacts to their businesses and they should benefit further as vaccines become widely distributed and normalcy returns in 2021. Let's start with Avis Budget Group . This company has benefited from a robust used car market, allowing it to profitably right size its fleet and has taken $2 billion out of its annual operating costs since the pandemic began. Avis recently delivered a solid third quarter, has $2.4 billion of liquidity, as well as an aggressive share repurchase program, and some recent insider buying. CAR shares have had a huge bounce off their March lows but are still significantly below the $50 level, which they hit prior to the outbreak. I started a position in CAR last week using the May $37 call strikes, which is just above the current trading level of the stock. Meanwhile, I took an initial position in Foot Locker Tuesday using this same method utilizing the May $40 calls. While profits obviously slid like every other retailer, this company has posted two quarters of better-than-expected quarterly results despite the coronavirus. It has built a robust direct-to-consumer model that has served it well during the lockdowns. Foot Locker exited the third quarter in excellent fiscal shape, with cash and equivalents of $1.4 billion, nearly $2 billion in liquidity, and only $129 million of debt. Analysts expect the company to earn a little over $4.25 a share in FY 2022 (January). Stripping out cash, FL trades at approximately six times those earnings and offers a small divided payout of around 1.5% as well. Both of these strategies provide downside protection in the low teens. They also can deliver an approximate 15% return over the roughly five and a half month duration of the covered call positions even if the underlying stock treads water. In an overbought market, that isn't chump change.

Let's Play 'Small Ball' With These 2 Stocks

I am happy to trade more limited returns for lower beta right now using covered call strategies.

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