JetBlue (JBLU) gained 22 cents to $4.48 and 5,000 calls traded on the airliner, compared to only 43 puts, Tuesday. The top trades of the day hit the January 2010 calls at the $5 strike in morning action when JBLU was near $4.30. 2,000 contracts traded total and, according to a contact on the floor, at least 1,000 were part of “buy-write” or covered call strategies.

In most “buy-writes”, 1 call is sold for every 100 shares and the strategy is used to generate income from an existing position and or lower the cost basis of purchasing shares. For example, using JBLU closing prices, shares can be purchased for $4.50 and the JBLU Jan (2010) call at the $5 strike is bid for 95 cents. Assuming the strategist can collect $1 even for the calls against shares, the cost basis for each JBLU share falls to $3.50 (per 100 shares because the multiplier is 100).

The cost basis of $3.50 ($4.50 per share minus $1 per contract) becomes the new downside breakeven, which is 22.2 percent below the current share price. The upside through the January expiration is $5 (the call strike price). A move to $5 (+11.1 percent) by the expiration will result in assignment of the call and the investor will surrender 100 shares per call option for a profit of $1.50, or 42.9 percent.

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Good Trading!