Vertiv is a highly ranked stock sitting just above the 21-day exponential moving average. Income investors interested in a serious growth company such as VRT stock might consider a strategy known as a covered call.
Vertiv is also trying to reclaim its 10-week moving average on the weekly chart. Doing so would help the stock's efforts in forming a new base.
Columbus, Ohio-based Vertiv provides digital infrastructure and continuity solutions. It offers hardware, software, analytics and ongoing services. According to IBD Stock Checkup, VRT stock ranked No. 2 in its industry group and has a Composite Rating of 97, an EPS Rating of 98 and a Relative Strength Rating of 99.
A covered-call strategy is one way to slightly reduce the risk on a long stock position while also generating some premium. The catch? Upside in the stock gets limited above the covered-call strike.
Let's look at how a covered-call trade on VRT stock might take shape.
VRT Stock Strategy: The Covered Call
Buying 100 shares of VRT stock would cost around $9,180, based on recent trading. So, an Aug. 16-expiration call option with a 95 strike price was recently trading around $7.15, generating $715 in premium per contract for the seller.
Selling the call option generates an income of almost 8.5% in just over one month, equaling around 77% annualized.
If VRT stock closes above 95 on the expiration date, the shares will get called away at 95. This would leave the trader with a total profit of $1,035 (gain on the shares plus the $715 option premium received). That equates to a 12.23% return, which is 111.6% on an annualized basis.
Risk Vs. Reward
Of course, the risk with the trade in VRT stock is that it might also drop over the longer term, 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.
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 setup is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
