As we move into the softer seasonality, the desire to hop over the sticky bits is front and center. Today, we look at Jacobs Solutions and study a leap covered call in Jacobs stock.
A leap covered call refers to an option position that is well into the future, customarily one year or more. But our trade today is going to expire in January 2026.
The selling of the call option well into the future allows the trader to hold the stock at a discount. If Jacobs stock continues to rise, the call option can be covered. Then, open a new option against the stock (commonly called rolling the strike). Why do that? We continue to both hold the stock and collect more revenue as time moves forward. But if Jacobs stock fades, we have a solid cushion of profit the short call provides.
Jacobs Stock: The Trade
In this trade, we buy 100 shares of Jacobs stock, which recently traded at 138.90. Then we sell one Jan. 16 expiration call option with a 140 strike price, which recently priced at $10.20 at the mark, or the midpoint between the bid and the ask prices.
The break-even price of the stock at expiration on this trade arrives by subtracting the credit received against the cost of the stock position. So, we get $13,890 - $1,020 =$12,870, less commissions. This implies the actual cost of each share would be reduced to $128.70, a 9% discount.
Jacobs is slated to report fiscal Q3 results on Aug. 5. Wall Street sees earnings of $1.53 a share, up 18% vs. a year ago, on a nearly 7% revenue increase to $3.07 billion.
Trade Management
The relative resistance zone is around 150, while support sits near 105.
Consider holding the stock and the option until expiration. If Jacobs stock trades above 140, the trader will relinquish the stock at that price, then collect the difference between the actual cost of the shares and the 140 strike price. That comes out to $11.30 per share, or a nearly 9% return.
Set an alert for 128, or near the break-even price. Sell the entire position if your risk thresholds are breached.
A bullish trader might say, "Shouldn't I sell the call much further out of the money if I am bullish on the stock?" Yes, but if the market has any retracements of importance, selling the strike at the money provides a cushion of support while still buying the stock for potential upside.
- 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, Investors Business Daily, the Benzinga Pro platform as well as Topstep on YouTube
