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Possible Covered Call For Sunoco

01/19/11 08:57:33 AM
by Donald W. Pendergast, Jr.

The broad US stock indexes apparently just don't know when to stop rising. Until rationality returns, why not make the most of whatever bullish sentiment is left?

Security:   SUN
Position:   N/A

Shares of Sunoco (SUN), the Pennsylvania-based energy giant, have been doing quite well lately, up by nearly 100% since last July. The stock is at a critical juncture right now, one that might determine the stock's directional inclinations over the next several weeks. Here's a closer look, using the weekly chart for SUN (Figure 1).

FIGURE 1: SUN, WEEKLY. If the broad markets cooperate and keep rising, this short-term covered call setup in Sunoco shares looks about as low-risk as they come. A strong weekly close above the Fibonacci 79% retracement will be a strong confirmation that this trade is a go.
Graphic provided by: MetaStock.
If you've ever lived in the Northeast or mid-Atlantic areas of the US, then you're probably very familiar with the bright yellow Sunoco gas station signs along most of the interstates and city thoroughfares. The company is one of the only remaining suppliers of super high octane gasoline, kind of like the nasty leaded stuff that 1960s and 1970s street machiners used to feed their 427-powered Chevys and 440-wedge Mopars on Saturday nights.

Today, shares of the company's stock have also been supplying investors with superior gains for the last six months, but with the stock now having retraced 79% of its momentous fall from its early 2009 highs, we need to perform some due diligence to see if SUN is worthy of additional consideration for new long entries. See Figure 2.

FIGURE 2: COVERED CALL. The covered call rate of return, option greeks, bid-ask, and strike prices are all in a single, easy-to-decipher format under the Thinkorswim trading platform's Trade tab. Virtually any conceivable option or option spread can be exhaustively analyzed in the TOS platform.
Graphic provided by: Thinkorswim.
Even with my firm belief that a major stock market correction is due within the next month, for right now we need to rely on what the chart is showing us, and SUN's weekly chart appears to be offering savvy investors a low-risk covered call opportunity.

As of the close on Tuesday, January 18, 2011, you can buy a February SUN $42 covered call for $40.40. This is an at-the-money covered call (with the stock being at $41.83) and will provide an annualized return of approximately 37% if the stock is called away at February options (February 18, only 30 days from now) expiration. While that rate of return sure beats the pitiful CD rates at the local bank (remember those nice 10% -plus rates on CDs and Treasury bills in the early 1980s?) nowadays, you must remember that the trade might also go sour, stopping you out for a minor loss. The best way to know when to close out the trade for a loss is to simply monitor that blue dashed up trend line on the chart, watching to see if SUN shares make a weekly close below it before expiration Friday. Unless the stock makes a wildly bearish reversal move beneath the line, chances are that your loss will be relatively benign.

If the stock continues to grind higher, just smile and count the days till February 18, thankful that you live in a country that allows ordinary traders and investors the incredible opportunity to participate in such an amazing, creative process -- one that allows for risk capital to be deployed in a quest for capital gains from the stock, options, and futures markets.

Long live free enterprise and free markets, and may we never, ever, take the wonderful opportunities they offer us for granted.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address:

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