ADP Option Update

This article is a follow up regarding the Automatic Data Processing, Inc. (ADP) out-of-the-money covered call option trade I placed in early February 2019.

Summary

  • In early February I recommended a short-term conservative option strategy on the basis that I viewed ADP as being richly valued.
  • A comparison of ADP’s current valuation relative to the FY2011 – FY2018 timeframe suggests ADP continues to be overvalued.
  • Shares have pulled back from a 52 week high following the recent release of ADP’s Q3 results and I anticipate a further pullback prior to the expiry of the options I previously recommended.
  • I present a potential option trade if there is a strong probability shares will close above the $155 strike price and you do not want to have your ADP shares called away.
  • An additional bearish option trade is presented if you think ADP will remain overvalued over the short-term.

Introduction

I view Automatic Data Processing (NADAQ: ADP) as a long-term investment. I have, however, mentioned in previous articles that even if I view a company as a long-term investment I have no objection to taking short-term conservative bearish positions by employing conservative option strategies.

In my February 2nd article I wrote that I viewed ADP as richly valued and indicated I would be writing out of the money covered calls to generate additional income. In my February 4th article I provided details of my covered call option trade; ADP was trading at ~$143.63 when I wrote $155 May 17, 2019 covered calls.

I collected $2.15/share meaning my breakeven level is $157.15/share calculated as the $155 strike price plus the $2.15/share option premium (excludes nominal commission).

If you look at ADP’s stock chart subsequent to early February you will see shares have been on an upward trajectory and recently reached ~$165 on April 23rd. Following the release of ADP’s Q3 results on May 1st, however, shares have retraced somewhat; ADP closed at $158.42 on May 2nd.

I am currently slightly underwater on this trade but am of the opinion ADP’s share price will retrace further as we approach the May 17th option expiry.

In this article I present my game plan in the event the share price pullback I anticipate does not materialize prior to expiry. In addition, I provide another short-term and conservative option trade which can be employed if you do not own the underlying shares and agree with my analysis that suggests ADP is overvalued.

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Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.

Disclosure: I am long ADP.

I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.