Try a Covered Call on Quest Diagnostics

Medical testing firm should rise as healthcare improves

Earnings season is officially underway and we are looking into the healthcare sector for an earnings play before next week.

Quest Diagnostics (NYSE: DGX) provides diagnostic testing, information, and services in the U.S. and internationally. It is scheduled to report first quarter 2011 results on Wednesday, April 20 before the market opens.

DGX is heavily involved in merger and acquisition activity. Last week it announced the completion of its purchase of Thermo Fisher Scientific’s Athena Diagnostics business. It also is buying diagnostics company Celera Corp. (NASDAQ: CRA), in a deal it expects to close by April 25.

DGX should benefit as the healthcare sector improves.

Based on the current stock price and valuations, we prefer a mildly-bullish buy-write position going into earnings.

An investor could purchase DGX stock at $57.64 and sell the DGX May 60 Call for a premium of $0.70. (Double check the option chain for current prices).

In this trade the investor would purchase 100 shares (100 x $57.64 = $5764.00) and sell the May 60 Calls (out-of-the- money) at $0.70 (1 option x $0.70 x 100 = $70.00).

The investor earns the premium for writing (selling) the option, and participates in some of any up turn in the stock. However, the investor must deliver the stock at $60 if it trades at $60 or higher before May expiration.

The investor’s break even point on DGX shares is $56.94, or the price of the stock purchase minus the option premium received ($57.64 – 0.70 = $56.94).