Simon Property Group was added to the IBD SwingTrader portfolio on Jan. 10 and is sitting right around the 52-week high.
Income investors might consider a strategy known as a covered call on the owner of shopping malls.
A covered call strategy is one way to slightly reduce the risk on a long stock position while also generating some premium. The catch is that upside is limited above the covered call strike.
Let's look at how a covered call trade on SPG stock might take shape.
Buying 100 shares of Simon Property would cost around $14,550 based on Tuesday's closing price.
A Feb. 16, 150-strike call option is trading around $2.50, generating $250 in premium per contract.
Selling the call option generates an income of 1.75% in one month, equaling around 20.5% annualized.
If Simon Property closes above 150 on the expiration date, the shares will be called away at 150. That leaves the trader with a total profit of $697 (the gain on the shares plus the $250 option premium received).
That equates to a 4.87% return, which is 57.4% on an annualized basis.
Main Risk With Shopping Mall Owner
Of course the risk with the trade is that SPG stock might drop, which could wipe out any gains made from selling the call.
Covered calls can be an effective strategy for generating income, managing downside risk, and reducing the effective purchase price of a stock.
According to the IBD Stock Checkup, the shopping mall stock is ranked No. 11 in its industry group and has a Composite Rating of 84, an EPS Rating of 84 and a Relative Strength Rating of 90.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
