Author: The INO.com Team

Introduction

I’ve written a series of articles detailing the utility of options trading and how an investor can leverage a long position in an underlying security to mitigate risk, augment returns and generate cash. This strategy comes with two alternatives, in the end, depending on whether or not one desires to realize gains and relinquish his shares or remain long the security of interest. I’d like to highlight Salesforce.com Inc. (NYSE:CRM) as an example for this covered call strategy. I’ll be highlighting how I’ve successfully accentuated my returns via leveraging the underlying security in the form of collecting option premiums over a 20-month span. In this example, I decided to ultimately realize gains generated from the underlying appreciation of the stock combined with the options income and relinquish my shares. Taken together, the synergy of the options income and appreciation of the underlying security generated a realized gain of 27.9% over this timeframe.

I’m utilizing a high growth technology stock that’s at the intersection of syncing the customer and enterprise relationship via social, mobile and cloud platforms. Salesforce is a contentiously debated aggressive growth stock that trades on lofty valuations. Salesforce is marginally profitable and thus difficult to assign a valuation as measured by traditional metrics such as the price-to-earnings multiple (P/E ratio) and the PEG ratio. Due to its rapid growth, expanding footprint, major partnerships with Fortune 500 companies (i.e. Home Depot, GE, Wells Fargo, Coca-Cola, etc.), expansion into international markets and its overall ubiquity in terms of its consumer relationship management (CRM) platform, it's reasonable to see why investors are willing to pay a premium. Much of its revenue is deferred as a result of its subscription-based model thus deferred revenue is often discussed on earnings calls. Deferred revenue is not yet realized revenue however it’s been received by the company. Since Salesforce delivers its service over time, this received amount isn’t reported as traditional revenue since the service hasn’t been rendered. Due to these factors and the difficulty of placing an accurate valuation on Salesforce, options in the form of covered call writing may be an effective way to leverage this growth stock while mitigating downside risk. Salesforce offers the right balance of volatility, liquidity and a high level of interest which gives rise to reasonable yielding premiums on a bi-weekly or monthly basis. This set-up bodes well for those who are long Salesforce (or a stock similar in nature) and desire to leverage options trading to augment returns and mitigate risk throughout the volatile nature of this underlying security. Salesforce’s recent string of earnings has impressed investors, and covered call options may accentuate this underlying equity return. Writing covered calls in an opportunistic and/or disciplined manner may mitigate losses and smooth out drastic moves in this underlying security. Continue reading "Mitigating Risk, Accentuating Returns and Realizing Gains - 27.9% Return" →