Constellation Energy recently reported another solid quarter of results and continues to advance, while the energy industry continues to show upside. As cross currents between price action and macro undercurrents continue, longer-term positions like leap covered calls might be a viable option for Constellation Energy stock.
Leap covered calls combine a tax advantage of a long-term capital gains along with cushion, should prices begin to move sideways.
A leap covered call involves the purchase of the stock and selling an out-of-the-money call. It's done at least 12 months in advance in order for the trade to potentially qualify as long-term gains.
The term leap simply means that we position the option well into the future. That is, it involves using a bullish position that gives us time to wait out the sideways churn ahead.
Trade Setup For Constellation Energy Stock
Here's how a leap covered call for Constellation would work.
First you start by buying 100 shares of Constellation Energy stock at their recent price of 292.43; then, you can sell one call option well into the future. Sell to open one set of Constellation 340-strike calls at $43.60, set to expire June 18, 2026, based on recent trading.
Find the break-even price for this position by taking the stock price and subtracting the credit collected. That is $292.43 minus $43.60, which equals $248.83.
Calculate the maximum profit for this position by using the call strike price of $340 and subtracting the break-even price. That is $340 minus $248.83, which equals $91.17 less commissions. That would deliver a 36.6% return from the break-even price and a 31% gain from the amount paid to buy the stock at 292.43.
This support zone is the gap fill from the earnings event.
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Steps To Take In Management Of The Trade
While handling this kind of trade, it's important to identify key chart levels. The relative resistance zone sits right around 350, but trading could be choppy for months with potential market uncertainty. Further, support sits near 250.
This strategy provides some simple exit choices.
First, investors can look to sell the entire position if the stock price slips below a risk threshold that is comfortable. Using Investor's Business Daily's structure for loss thresholds also is recommended.
Second, a trader can allow the position to expire and surrender the stock should it continue to rise. That allows for reaping the full profit as long-term capital gains.
And finally, the investor also can terminate the trade at the break-even point near 249. This may make sense if the stock price drifts down into support levels and does not immediately recover on volume.
Anne-Marie Baiynd is a 25-year veteran trader of stocks, options and futures and is the author of "The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology." You can find her on X at @AnneMarieTrades, Sirius Business Radio, and Investor's Business Daily. She's also found on the Benzinga Pro platform as well as Topstep on YouTube.
