Coronavirus isn’t going away any time soon, and that means the U.S. economy isn’t likely to be at full steam for months to come. Thus, Jerome Powell and the Federal Reserve are likely to keep interest rates near zero for the foreseeable future—meaning there aren’t many places for income investors to go if you want to create yield. That said, there is an alternative way to create yield against your stock holdings: sell covered calls, which is exactly the strategy we use at Cabot Profit Booster.

How to Sell Covered Calls

A covered call is an options trading strategy in which the trader holds a long position in a stock and sells a call option on the same stock in an attempt to generate income. For example, if I owned 100 shares of Apple (AAPL) I could sell one call against my 100 shares. And when I sell that call I collect a premium (essentially collecting an insurance premium).

Here is an example of a covered call trade alert that we executed at Cabot Profit Booster last month.

The Stock – CrowdStrike (CRWD)

Despite the self-induced recession, the stay-at-home economy is booming thanks to companies that are letting employees work from home—and even after things go back to normal, it’s likely some of this new workplace flexibility will be here to stay. Helping keep the cloud secure is CrowdStrike (CRWD), which facilitates endpoint detection and protection on or off networks, as well as on major platforms such as Google Cloud and Microsoft Azure.

Using crowdsourced data from users, it deploys artificial intelligence to predict whether a threat is malicious or not and its services span beyond security into “systems hygiene,” which allows clients to see who’s on their network and what applications they’re using, as well as how user accounts are being accessed.

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CrowdStrike has been growing rapidly for a while, but the stock has perked up due to expectations of continued excellent results thanks to the world’s new reality. CrowdStrike’s revenues are mostly subscription-based, and this metric was up by an eye-popping 99% last year. For the latest quarter, subscription revenue (+90%), annualized recurring revenue (+92%, up to $600 million at year-end) and subscription gross margin (+77%) also grew impressively. Despite negative earnings, the company was cash flow positive in Q4.

Best of all, once companies go with CrowdStrike, they don’t leave (98% retention rate) and tend to add a lot more services over time (same-customer revenue growth of 24% in Q4). Looking beyond the pandemic, CrowdStrike is definitely one of the leaders in the “new-age” cybersecurity sector, as firms need new solutions to deal with the move of their systems and apps to the cloud.

Technical Analysis

After a post-IPO rally to 100 last summer, CRWD was cut in half by October and really couldn’t get off its knees, even as the market went nuts through February. The COVID-19 panic resulted in a huge break of support, but what’s been impressive has been the rebound—CRWD exploded off the bottom on two weeks of huge trading volume, and after some tightness in the 60 area, it’s extended to multi-month highs. We suggest aiming for a bit of a pullback and using a loose stop. Stop – 65

The Covered Call Trade

Buy CrowdStrike (CRWD) Stock at 80, Sell to Open the July 85 Calls (exp. 7/17/2020) for $6, or a Net Price of 74 or less

Static Return: $600 per covered call (8.1%)

Break-even: 74

Covered Call Return (if assigned): $1,100 per covered call (14.86%)

The above trade idea is a perfect example of what you get at Cabot Profit Booster, along with access to me via email if you are new to this strategy, or if you have any general questions about how to sell covered calls.

Jacob Mintz
Jacob Mintz

Chief Analyst, Cabot Profit Booster