<%@ Control Language="c#" AutoEventWireup="false" %>
Michael Haden's Insights
Options Analyst Writer
11/23/2015 - Hain Celestial is a natural for a covered call
The Hain Celestial Group, since its founding 20 years ago, has grown into the world’s largest natural foods company with $2.74 billion in revenue. Hain has a close relationship with Whole Foods and, as its largest supplier, has paralleled the grocer’s rise.
Hain has built its fortunes through acquisitions of natural food producers that target wealthy, health-conscious shoppers. Over the years, HAIN has made additions such as Celestial Seasonings, Ella’s Kitchen and the BluePrint juice company.
Activist investor Carl Icahn was so enticed by HAIN’s offerings that he has become the company’s biggest shareholder with a 15% stake. His son Brett sits on the Hain Celestial board.
Despite this solid record of growth, HAIN’s most-recent quarter produced disappointing results. The company missed net sales estimates by 2%. The miss was largely attributed to foreign exchange rate movements as 37% of HAIN sales are generated internationally.
You may see HAIN’s recent downturn as a buying opportunity. If so, you can use a covered call strategy to help protect your investment. In this strategy, we will sell one call contract for each 100 shares of HAIN stock that we buy.
This premium from our sold calls will give us with some cushion in the case that the stock should take an unexpected downward turn. HAIN stock has been remarkably steady for some time. This type of stable performance is what we are looking for in a covered call. The sold call is an agreement to sell the stock at the strike price of our option, so we’ll want to make sure we pick a strike price that allows us to get the right balance of risk and reward.
Chart courtesy of www.stockcharts.com
We start off with a purchase of 100 shares of HAIN stock trading at $41.64 .At the same time, we will sell a Feb.‘16 $40 call for $3.90 against those shares. We pay $4,164 for our 100 shares of HAIN while we receive $390.00 for the call option. That means we have a total investment of $3,774, or $37.74 per share. Our target return for this trade is 5.8% over 93 days which is 14.96% annualized. Our HAIN stock will have to drop by 9.3% before we have a problem.
Let’s look at how our trade might turn out:
When we reach the February expiration date, HAIN stock could finish up above our $40 strike price. In this case our call will be assigned and we will sell our HAIN shares at $40.00. Since we received that $3.90 per share credit up front, our actual money in this trade is $37.74, which means selling at $40 gives us a profit of $2.26 per share.
On the other hand; at expiration, If it is below the $40 strike price, our sold call will expire worthless and we will get to keep both the original credit we got for selling it plus our underlying shares. At that point we can decide if we would like to sell another call and repeat the process..
Articles and other Content