Chasing Paper Profits And 46.5% Annualized Return Potential

For an economy that many believe to be on the verge of recession, it may be surprising that businesses is brisk in the paper and packaging business. The company serving as the underlying stock for this trade is expected to grow revenue 11.4% to $21.6 billion, with earnings up 41.7% to $4.53 per share. Sales and profits both exceeded expectations when the company reported second-quarter results on July 28.

With the next earnings report not due until the end of October, we will buy the stock and sell October 21 calls that offer the potential for a compelling 46.5% annualized return.

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International Paper (IP) – Buy Write

Buy 100 IP

Sell to Open 1 October 21 $42.50 Call

Execute for Net Debit of $40.00 or lower

Memphis, Tenn.-based International Paper (IP) is a global giant in the pulp, paper, and packaging business, manufacturing packaging products and cellulose fibers. IP’s packaging business, which generated 86% of revenue last year, accounts for more than 30% of the corrugated packaging market in North America, where it does more than 75% of its sales. It also operates in Brazil, India, and China. IP serves a variety of end markets, including industrial, consumer products, and manufacturing.

There is no ex-dividend date coming up until November, and the next earnings report is October 28.

Here is the buy write: Buy 100 shares of IP, and sell to open one contract of $42.50 October 21 calls. Use a net debit of $40.55 or lower.

If IP closes above $42.50 at expiration on October 21, your calls would be assigned and your shares sold at $42.50. This would produce a profit of $2.50 per share on $40.00 at risk, or 6.25%. Over 49 days, that would be 46.5% on an annualized basis. If IP closes at or below $42.50 at expiration, you would still own the stock at a cost basis of $40.00, reflecting the premium earned today.

Options income for this trade: We earn $100 selling 1 IP October 21 $42.50 call contract. Click here for updated bid-ask and return characteristics.

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