Solid Stocks for Summer Option Profits
Options usually are high-maintenance. For better or worse, they demand careful watching as any move in the underlying can have a big impact on your position.
Fact is, options traders do not have the luxury to do the ‘Sell in May, go away’ baloney. You have to research the underlying, find the right trade, and send it in with the hope you get a decent fill. And once you’re in you have to check the position four times a day to make sure it doesn’t get away from you.
It’s nearly summer. Is there such a thing as an option trade that lets you relax in the hammock for a bit?
Our options trading experts considered this and responded with six trades that give the investor some peace of mind. First, they chose solid-as-a-rock stocks like McDonald’s (NYSE: MCD), IBM Corp. (NYSE: IBM) and Caterpillar (NYSE: CAT). Then they focused on farther-out months, so you don’t have to worry about expiration every few weeks.
Please click through to find six option trades that offer summer profits and relaxation.
IBM Corp. (NYSE: IBM)
By Sam Collins, Chief Technical Analyst, InvestorPlace
“Big Blue” is the bluest of the blue-chip technology giants. Its global capabilities in information technology, computer software and hardware, and related financing make it a household word. IBM struggled for most of last year but broke from a reverse head-and-shoulders bottom on April 21 that now has a trading objective of $180. Standard and Poor’s rates IBM a 4-Star Buy with a 12-month objective of $196. Buy an IBM Oct 170 Call at $9 or lower for a target of $15.
Coca-Cola Co. (NYSE: KO)
By Sam Collins, Chief Technical Analyst, InvestorPlace
Coca-Cola manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. A powerful breakout in March, following a “deep V” market bottom, drove KO to new highs in April. KO was one of our “Stocks for 2011” published in December, and it has not been a disappointment. On May 12 it broke from a triangle and appears well on its way to achieving a technical target in the high 70’s. S&P has a Five-Star Strong Buy rating on KO; Wells Fargo just started coverage of the stock with an “Outperform”; and Credit Suisse recently raised its 12-month target to $95 from $80. Buy the KO Nov 70 Call at $2.25 or lower for a target of $6.
Caterpillar (NYSE: CAT)
By Chris Johnson and Jon Lewis, The Winning Edge
This Dow heavyweight has taken its lumps of late. After cresting to an all-time high in early May, the stock fell about 13% in about two weeks. Strangely, the decline came right after CAT reported strong earnings in which it beat on both the top and bottom lines and raised guidance for FY 2011.
The decline caused the shares to hit their most oversold level since last August, right before CAT embarked on an eight-month rally that covered more than 80%. You can’t keep CAT down for long, though, as the stock has started to rebound higher off its 100-day moving average.
Sentiment toward CAT is surprisingly mixed. The put/call ratio is rising, and nine of 24 analysts still consider it a “hold.” That tells us there’s enough pent-up buying pressure waiting in the wings.
CAT is a strong global company that should continue to prosper as the world economy picks up steam. The recent pullback and technical bounce suggests it’s a great time to jump aboard the CAT bandwagon. Buy the CAT Nov 110 Call for less than seven bucks.
McDonald’s (NYSE: MCD)
By Chris Johnson and Jon Lewis, The Winning Edge
McDonald’s has been on a solid run for two months, gaining around 11% to hit an all-time high. The combination of new product offerings and process innovations along with steady growth abroad has kept MCD atop the fast food pile.
Despite the recent success, we’re seeing healthy skepticism toward the shares that should keep the rally going (the “wall of worry” is intact). The put/call ratio is coming off a peak, suggesting that pessimism among options players is starting to unwind. And nine of 24 analysts rate MCD a “hold” despite the stock outperforming the broader market for more than three months.
Nobody knows how to thrive in the rough-and-tumble world of fast food better than MCD. There may be some bumps and bruises along the way, but the company … and the stock … always manage to navigate through the obstacles. Buy the January 2012 80 Call for five dollars or less.
Corning (NYSE: GLW)
By Michael Shulman, Editor, Short-Side Trader
Two trades look very good right now — two winners from the incredible success of the Apple (NASDAQ: AAPL) iPad and the explosive growth in the tablet market, now expected to be more than 35 million units this year. One is a very low volatility name — Corning (NYSE: GLW), the other highly volatile, SanDisk (NASDAQ: SNDK).
Corning is the maker of something called GorillaGlass and it is used in iPads. The stock took a hit, stabilized around $20, and is now rising as the company is clicking across the board. The company is selling at less than half the market multiple — ridiculous given its position in the real world. I recommend long term calls on GLW, January of 2012 or January of 2013, $25 strikes or higher if you get to this after the stock begins to run.
SanDisk (NASDAQ: SNDK)
By Michael Shulman, Editor, Short-Side Trader
SanDisk is the world’s premier maker of NAND flash memory in the world. Guess what kind of memory is used in tablets and most smart phones. The company both makes the products and receives licensing fees from other makers of these products. SNDK is very volatile, which is unusual given the position of the company in the marketplace and its very low valuation — less than nine times earnings, half the market multiple. If you can forget the volatility, it is a great longer term play. Look at calls in October or later and strikes of $50 or above.
