A Pretty, Simple Options Trade

Go long on positive-looking Estee Lauder

   

You might have heard this old trading saying that compares a stock to a pig and implies that you can’t put lipstick on a pig and make it look good. I apologize to people that love pigs because I am a swine lover myself. But when you think about it, traders often try to force something positive out a weak-performing stock.

Here is a trade idea on a stock that needs no makeup at all — as it looks pretty good just the way it is.

Estee Lauder Companies Inc. (EL – 61.82): Long Calls

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The trade: Buy the Estee Lauder (NYSE:EL) October 62.5 calls for $1.25 or less.

The strategy: A long call is probably the most basic option strategy there is. The position can take advantage of a bullish outlook on a stock. A long call can profit if the stock rises and the call premium increases to an amount more than was paid. Maximum profit is essentially unlimited with a long call because the stock can continue to rise, and the maximum loss is $1.25 (or whatever was paid) if EL finishes below $62.50 at October expiration. Breakeven is at $63.75 at expiration based on a cost of $1.25.

The rationale: Estee Lauder produces skin care products, makeup and fragrances. The company reported earnings last month and fourth-quarter revenues were up 9% from 2011. For the full year, revenues were up 10% compared to last year. The company expects net sales to increase about 6%-8% for the full year of 2013. In other words, things are looking pretty positive for Estee Lauder.

Technically, EL stock is right at a resistance area (prior pivot highs and lows) that it needs to get past. That will be the key to success for this trade idea. A bullish sign for Estee Lauder is if it can trade above Friday’s high, which was $62.24. If the stock does move higher, the next area of resistance for the stock is right around $64, which was a previous pivot high.

It seems like making money and being beautiful never go out of fashion.

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


Article printed from InvestorPlace Media, http://investorplace.com/2012/09/a-pretty-simple-options-trade/.

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