Bearish Bets on a ‘Kill-JOY’ Market

by John Kmiecik | June 18, 2012 9:01 am

The market has been doing its best to overcome much of the negative news and reports that have been thrown at it lately. The same can be said of quite a few stocks. Then, there are other stocks that have fared rather poorly when taking into account that many economies around the world are slowing.

Here is a trade idea on a stock that has brought joy to bearish traders during the past couple months:

Joy Global (JOY – $55.84): Long Puts

The trade: Buy the Joy Global (NYSE:JOY[1]) July 55 puts for $3 or less.

The strategy: The long put is a strategy that can be used for a bearish outlook on a stock. The trade profits if the stock falls and the put premium increases to an amount more than was paid. Maximum profit is almost unlimited only because the stock can fall to $0 (which is highly unlikely), and the maximum loss is $3 (or whatever was paid) if JOY finishes at or above $55 at July expiration. Breakeven is $52 at expiration based on a $3 cost.

The rationale: JOY manufactures and services mining equipment. The stock has taken a tremendous fall from about $95 back in February of this year to where it currently is trading. The unfortunate fact is that the company operates in a sector that takes into account the overall economy. Given that economic growth has been slowing in countries where JOY operates and coal demand has been diminishing, it’s no surprise that the stock has tumbled.

The market finished the week rather bullishly, but JOY was unable to make much progress moving higher. There is no doubt that the stock probably will rise again, but based on the technicals, it looks like it might fall even lower. JOY has a two-year pivot low (significant low) right below $50. This might make an excellent target if JOY keeps falling.

A bearish sign would be if the stock can trade below Friday’s low, which was $55.20. If it can’t, it might be starting its rise.

As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.

  1. JOY:

Source URL:
Short URL: