Munch On a Buffalo Wild Wings Options Play

Finding a decent covered-call candidate in this market is not easy. Generally,
traders and investors try to find a stock that is trading sideways or maybe just
trending up. Another key is to find a company with solid fundamentals,
especially if you want to hold the stock for an extended period. Though there is
no guarantee that the stock will trend higher in the future, many traders would
rather hold a fundamentally sound stock than one with shaky financials. A
covered call is generally used to generate additional income for a stock
position. The strategy is to buy stock (or already own it) and sell a call
option against it. A good thing about a covered call is that it can profit even
if the stock trades sideways, because if the short call expires worthless, the
premium is yours to keep, which helps offsets the cost of the stock. Let's see
what looks good this week. Buffalo Wild Wings (NASDAQ: BWLD ) has pretty decent
fundamentals. The stock has been trading in a range between $58 and $64 for
about the last month. With support at $58 and resistance at $64, the October 65
call looks like the option to sell. This trade gives the stock some upside
potential to go higher, and the break-even point on the trade will be somewhat
close to the technical support. The Trade: Buy 100 shares of BWLD at $61.50 and
sell October 65 call at $2.20 Cost of the stock: 100 x $61.50 = $6,150 debit
Premium received: 100 x $2.20 = $220 credit Maximum profit: $570 that's $350
($65 – $61.50 x 100) from the stock and $220 from the premium received if BWLD
finishes at or above $65 at October expiration. Break-even: If BWLD finishes at
$59.30 ($61.50 – $2.20) at October expiration. Maximum loss: $5,930, if BWLD
goes to $0 at expiration. The main objective with a covered call is for the
stock to rise up to the sold call's strike price in this case, $65. The stock
moves up the maximum amount with being called away and the sold call expires
worthless. If the stock moves past $65 and looks like it's not going to slow
down, then the call that was previously sold (October 65) can be bought back and
a higher strike can be sold against the position to avoid assignment. This will
allow the stock to remain in the portfolio and also give the position a chance
to increase its return. Remember: No matter how far the stock goes beyond $65 at
expiration, the maximum profit is capped because of the call that was sold at
the 65 strike. If BWLD plummets, the stock can be sold, and the short option can
be bought back to try and reduce losses. The company is scheduled to announce
earnings on Oct. 24. Every trade should have defined risk and loss parameters in
place even if the trader or investor is just "paper trading."