Alexion Pharma Offers a Prescription for Profits

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tdp2664 InvestorPlace When looking for potential options trading candidates, keep in mind that this week is still right in the middle of earnings season. Unpredictable things can happen to a stock after an earnings announcement. Take for example Netflix ( NASDAQ : NFLX ). The stock dropped more than 30% after its announcement, and the short premium received from selling a call above the price of the stock before it plummeted wouldn't be able to salvage that trade. One name that looks like it might be the right prescription for profits is Alexion Pharmaceuticals Inc. ( NASDAQ : ALXN ), which reported great earnings last week. ALXN develops drugs for cancer, autoimmune and neurological diseases, and several others. Sales for its drug Soliris, which treats a rare blood disease, have been rising. The company has exceptional fundamentals. ALXN has been on a slow and steady climb higher since the beginning of 2009. There have been a few pullbacks along the way, but nothing overly dramatic. The stock has found a nice support area in the $65 to $66 area and has resistance overhead in the $70 area, which makes the ALXN an ideal candidate for the covered call strategy, and the ALXN Nov 70 Call the logical choice to sell. A covered call is when you buy stock, or already own shares, and at the same time sell a call against your long position. Covered calls can generate additional income for a stock position. Another benefit of a covered call is that it is like purchasing the stock at a discount rate. The credit received from your short call partially offsets the purchase price of the shares of stock. Now the breakeven point of the trade is also lowered. This is especially beneficial if the stock drops in price some. Making the ALXN Covered Call Trade Example : Buy 100 shares of ALXN @ $66.91 and sell Nov 70 Call @ $1.60 Cost of the stock : 100 X $66.91 = $6,691 debit Premium received : 100 X $1.60 = $160 credit Maximum profit : $469 — that's $309 ($70 strike price – $66.91 stock price X 100) from the stock and $160 from the premium received if ALXN finishes at or above $70 @ November expiration. Breakeven : If ALXN finishes at $65.31 ($66.91 – $1.60) @ November expiration. Maximum loss : $6,531, which occurs in the unlikely event that ALXN goes to $0 @ November expiration. Managing the ALXN Covered Call Trade The main objective for this covered call strategy is for the stock to just rise up to the sold call's $70 strike price. The stock moves up the maximum amount without being called away and the sold call expires worthless. The breakeven point of the trade is structured to be at nice area of support as mentioned above in the $65 to $66 area. If the stock drops in price more than was anticipated, it might make sense to close out the entire trade (stock and short call) to avoid further losses. Options traders are not successful because they win.