Rising Stars Trade: Write New Covered Calls on Activision Blizzard

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This article is part of our Rising Star Portfoliosseries. Follow all of Alex's trades on Twitter.

Our covered calls on video-game maker Activision Blizzard (NAS: ATVI) expired worthless a couple weeks ago -- exactly what we wanted. We picked up the full premium on those options, pocketing a 3.2% yield in less than six weeks. Now, we're going to do it again.

It was my intention going in to repeat this trade as each subsequent option expired. But when our first calls expired on Aug. 20, the market's offerings just weren't very attractive. Activision's shares had sunk to the low-$11 range, and even though just the previous week had brought volatile daily swings in the market, premiums on options on Activision's stock remained stubbornly low.

The gifts of volatility
How things change in these markets! Less than two weeks later, we're able to re-establish our covered calls on Activision at an attractive premium. I'm going to write (option-speak for "sell") the October $12 calls, recently priced at $0.42 per share. Here are the potential outcomes of this trade:

  • If shares are below $12 at expiration, we simply pocket the $0.42 per share.
  • If shares are above $12 at expiration, our calls will be exercised and we will have to sell our shares at $12. We still get to keep the $0.42 premium plus the $0.38 premium we received on our first iteration of calls, so our net sell price would be $12.80, or a 7% return on our total position in just over three months.

My original thoughts on Activision haven't changed (for a primer on those thoughts, check out my original trade alert). Just like last time, either of these outcomes would be fine by me, which is why this strategy makes sense for my portfolio. Only make this trade if you can say the same -- with Activision's stock price currently around $11.80, there is a real chance that our shares will be called away in October (assuming we don't roll the calls).

As per our Rising Star trading rules, I'll be making this trade in my portfolio 24 hours after this trade alert is published.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios) here.

At the time this article was published Fool analyst Alex Pape does not own shares of any company mentioned. The Fool owns shares of Activision Blizzard.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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