Teva Pharmaceuticals (
TEVA
,
quote
) is the world's largest generic drug company, and the Israeli
manufacturer has a bullish future.
[caption id="attachment_56020" align="alignright" width="300"
caption="Teva has profitable emerging market operations"]
[/caption]
As the world grows steadily more affluent, particularly the
middle class in emerging market nations, there will be a
greater demand for health care, especially generic drugs.
The world's largest generic drug maker, Teva
Pharmaceuticals, is currently trading around $38.90 a share,
the mean analyst target price for the next year of market action is
$51.39.
UBS recently reiterated its buy rating for Teva on May 25, 2012
with a target price of $52. The mean analyst rating for Teva Pharma
is bullish at 1.90 (5 is the worst and 1 the best). Another
favorable indicator for Teva Pharmaceuticals is the lack of a short
float. With a short float of only 0.54%,
few are betting that the share price of Teva will
fall
.
But the share price of Teva Pharmaceuticals has fallen. Year to
date, Teva is down 2.31%. The last month of market action has seen
the stock drop another 6.80%. As a result of this and its above
average dividend yield,
Teva Pharmaceuticals is an attractive stop for
writing covered call options
to increase income while it recovers.
Writing a covered call option will result in a
Teva shareholder selling the right (but not the obligation) to
buy the stock at a strike price within a certain period of
time.
For example if Teva Pharmaceuticals had been bought at $30, you
might choose to write a covered call option at $40. As the stock is
now trading just under $39, that would allow for additional gains
to be booked. All of the shares do not have to be sold, so it's
possible to hedge against future price rises.
Income from writing a covered call option first comes via the
premium from selling to the buyer. If the stock is sold at a higher
price than bought, a capital gain is booked. As Teva
Pharmaceuticlas pays a 2.49% dividend, the dividend income is
earned before the call option is exercised.
After writing a covered call option on Teva, one of three
scenarios will transpire. As the great majority of options go
unexercised, most likely the stock is retained while earning the
premium income. This also happens if the share price falls, as
obviously the call option at a higher level will not be exercised.
If the share price rises, then the call option is exercised. This
results in capital gains, premium income from selling the option,
and any dividend income booked while owning the stock.
Given the euro zone crisis and weak growth in the United
States, China, and around the world, financial markets are not all
that promising - even for blue chip holdings such as Teva
Pharmaceuticals. Writing covered call options can create additional
income sources for the share holder as the market
recovers.
