Operating a search engine can be a very lucrative business, especially when your website holds a commanding and growing market share.
Russia’s Yandex NV (NASDAQ:YNDX) is the primary search engine for the Motherland. The company currently holds 61.9% of the Russian Internet search market, well ahead of its competitors. To help put that in perspective, Chinese search engine juggernaut Baidu.com, Inc. (ADR) (NASDAQ:BIDU) holds 70% of the market in its homeland.
Yandex NV (NASDAQ:YNDX) generates income by selling ads on its search site, which is very similar to the core business that Google Inc (NASDAQ:GOOG) operates. As Russia’s online population grows, Yandex is in a great position to capture more business simply by maintaining its dominance in the Russian market. Analysts expect the Russian Internet advertising market to grow by 26% through 2015, giving the company plenty of opportunity for further growth.
Yandex NV (NASDAQ:YNDX) has a strong history of revenue and profit growth, and while there are some seasonal elements to the company’s income (the first quarter is typically weaker than other quarters), the company continues to grow year-over-year profitability.
Premium Price, Premium Growth
When researching the investment prospects for YNDX, the only downside I could see is that the stock is somewhat pricey. Investors are currently paying 32 times earnings for the company, reflecting a significant amount of optimism.
Given the company’s growth prospects, I think the premium valuation is certainly justified. In fact, if the company grows earnings by 30% to 35% this year as management expects, the valuation might wind up being too conservative!
Of course, there is always a risk that the stock will back off within the context of a challenged market, but over the past few weeks, as the stock market has experienced more volatility, Yandex NV (NASDAQ:YNDX) has held up very well.
I’m particularly excited about this covered call setup because of the premium pricing for the option contracts. Even though YNDX has been relatively stable, option traders are pricing in plenty of volatility. This is likely because the overall Russian stock market has been very weak.
This pricing works in our favor because we can buy a stable, profitable, growing stock, and then sell call options against the position — calls that offer plenty of premium.
YNDX Covered Call Strategy
Today, we’re going to take a look at how investors can generate a 56% per year by setting up a covered call position on YNDX.
The stock is currently trading near $28.34 and holding well above key support levels. Since we’re still in a period of market volatility (and because the option premiums are so high), I want to sell in-the-money calls. This gives us a great income trade, while still protecting us against a modest drop in the stock price.
Currently, the August $28 calls are trading at $1.85. So we want to buy shares of Yandex NV (NASDAQ:YNDX) in 100-share lots, and then sell the YNDX Aug 28 Calls against the position. Remember, each option contract is equivalent to 100 shares of stock. So we only want to sell one call contract for every 100 shares of stock that we own.
Between our entry price of $28.34 and the $1.85 premium that we receive from the options, our net entry price will be $26.49. By selling the calls, we have an obligation to sell the stock at $28 as long as it stays above this level when the calls expire on Aug. 16.
If we are forced to sell our stock at $28, we will recognize a net profit of $1.51 per share. This represents a 5.7% gain over a 37-day period. Assuming we can continue to find opportunities like this throughout the year, this represents a gain of 56% per year.
Best of all, our trade gives us a significant amount of protection in case Yandex NV (NASDAQ:YNDX) backs off a bit. Since our cost basis is $26.49, the stock could drop a full 6.5% and we still wouldn’t realize a loss on the trade. And keep in mind that if this were to happen, we could turn around and sell more calls on this position to lock in additional income.
YNDX represents a premium covered call opportunity because of the niche in which the company operates. Over the next few months, we’ll continue to monitor special situations like this to find the best covered call opportunities.
$1,000 Per Month Trading System
You could collect $1,000 or more per month without buying a single stock. Click here to learn how…
.
