Don’t Cringe at This Company’s Cutbacks

by John Kmiecik | November 26, 2012 7:59 am

Sometimes to get ahead in life, you have to make some necessary cuts. It’s especially difficult to do so when what you are cutting out isn’t necessarily bad for you.

Stryker (NYSE:SYK[1]) is facing some unexpected costs and decided to do something about it; this trade idea might give traders a chance to profit from its expected move higher.

Stryker (NYSE:SYK — $54.52): Long Calls

The trade: Buy the January 55 calls for $1.20 or less.

The strategy: The long call is one of the basic strategies in options trading. The trade can profit if the stock rises and the call premium increases to an amount more than was paid. Maximum profit is unlimited because SYK can continue to rise, and the maximum loss is $1.20 if SYK finishes below $55 at January expiration. Breakeven is $56.20 based on a cost of $1.20 at expiration.

The rationale: Stryker is a medical technology company that offers a wide variety of products and services even though it generates most of its revenue from reconstructive implants like knees and hips. The company is expected to release new innovative products to help the company’s profitability in the long-term. The company also is cutting about 5% of its work force in anticipation of “Obamacare” — the company is trying to costs because of the additional taxes companies like SYK will face starting in 2013.

SYKchart 300x135 Don't Cringe at This Company's Cutbacks
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Technically, SYK had been trading in a range between $52 and $53.50 for just more than a month until this week. The stock was able to close above its horizontal 200-day simple moving average, which is generally considered a bullish sign and above the range it had been trading in. Look for another bullish sign if Friday’s high of $54.53 is surpassed.

The next stop for Stryker might be right around $56-$57, where the stock set a pivot high back in September.

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

Endnotes:
  1. SYK: http://studio-5.financialcontent.com/investplace/quote?Symbol=SYK

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