Looking for Profits with Valspar Covered Calls

With the economy recovering at a slower pace than predicted and people not able to buy new homes, homeowners have turned instead to fixing up their current dwellings. One of the easiest and most popular ways to spruce up a drab home is to slap a fresh coat of paint on it. Valspar (NYSE:VAL) is a company that can take advantage of the demand for paint and give traders and investors a chance to profit from the company�s growth.

VAL makes paints, coatings and polymers for the do-it-yourself and industrial markets. Even though the company�s sales gains have slowed a tad over the last few quarters, first-quarter sales were up more than 5% from 2011. The company remains fundamentally strong in terms of revenue growth, increasing net income and growth in earnings per share. Many analysts have the stock rated as a �buy.�

The stock just recently set its all-time high just below $50 back in March. Since then the stock has traded in a range between about $48 and $50. For the last three months, VAL has slowly trended higher by about $10, which makes it an excellent candidate for a covered call. A nice slow trending stock can be ideal and if the $48 support area can hold, VAL may be able to continue its trend higher again.

The Trade Idea � Covered Call�

Buy 100 shares of VAL at $49.46 and simultaneously sell the April 50 call for a credit of $1.10 or better. The overall debit for the trade is $4,836, with $4,946 spent on the shares and $110 collected from selling the call.

The maximum potential profit is $164, if the stock advances from $49.46 to $50. Profit peaks if VAL finishes at or above the 50 strike at May expiration. The maximum loss, in the unlikely event that VAL drops all the way to zero by the time the options expire, is $4,836. Breakeven for this strategy is $48.36. The trade will be profitable at expiration as long as VAL is trading north of this level.

Trade Management

The best-possible outcome and maximum profit potential for a covered call is for the stock to rise up to the sold call�s strike price at expiration, which in this case is $50. The shares move up the maximum amount without being called away and gains are enjoyed on the stock as well as the worthless call option.

In the event VAL goes on a bull run and moves past the $50 area with no signs of slowing down, then the call that was previously sold (May 50) can be bought back and a higher strike can be sold against the position to avoid assignment.

This allows the trader to keep the hares in his portfolio and also gives the position a chance to increase its return. With more than 40 days to go until May expiration, this is a possible scenario if the stock breaks above the $50 resistance level.

The breakeven point of this covered call is at $48.36, which is just above the support area around $48. Over the last several weeks, VAL has rebounded successfully from this support zone the few times is has been tested.

If the stock drops in price more than was anticipated, it probably makes sense to close the entire trade (stock and short call) to possibly avoid additional losses.

As of this writing, John Kmiecik does not own any shares mentioned here.�