Is it risky to trade a stock that you’ve never heard of? It might seem so, but if the technicals look compelling you can dive into the fundamentals of the company — and consider a trade if you like what you see. Here’s a trade idea on a company you may not have heard of … but if it goes the way I think it will, you’ll remember this name for a long time.
Trinity Industries (NYSE:TRN) operates in the industrial, energy, transportation and construction sectors. The company announced earnings last month, posting year-over-year growth of 11% and full-year revenue growth of 30%. The company just recently announced a quarterly dividend, which will make it the 196th consecutive paid dividend. The stock is generally liked by analysts.
The stock has been on quite a roll since the middle of November 2012, barely taking a breather as it grinds slowly higher. The stock has some long-term resistance on the 10-year chart just above $46 and just below $50. These areas look like good spots to sell calls at and bring in extra premium — especially if the stock continues to climb. If the stock stalls at these resistance areas, then the extra premium from the sold calls will come in handy.
I’m looking at a covered-call trade for Trinity. Here’s how it works:
- The trades: Buy 100 shares of TRN at $45.14 and sell the April 46 call at $0.75
- Cost of the stock: 100 X $45.14 = $4,514 debit
- Premium received: 100 X $0.75 = $75 credit
- Maximum profit: $161 — $86 ((46 – 45.14) x 100)) from the stock, and $75 from the premium received if TRN finishes at or above $46 at April expiration
- Breakeven: If TRN finishes at $44.39 ($45.14 – $0.75) at April expiration
- Maximum loss: $4,439, in the unlikely event that TRN goes to $0 at April expiration
The best-case scenario for this covered-call strategy is for the stock to just rise up to the sold call’s strike price ($46) at April expiration. The stock moves up the maximum amount without being called away and profits are enjoyed on the shares and the option premium. The process can be duplicated for the next expiration if so desired, using either the same 46 strike if the outlook on the stock is neutral or a higher strike if the stock looks like it will make a move to the higher areas of resistance.
And if TRN surges past $46 well ahead of expiration, there’s an adjustment that we can make. The 46 strike call option can be bought back, and we can sell a higher strike with April or a later expiration against the position to avoid assignment. Considering these options have $1 strike increments, we have multiple strikes to choose from. This flexibility will allow the stock to remain in the portfolio and gives the position a chance to increase its return — especially if the stock moves higher.
The breakeven point ($44.39) of the trade is about $0.39 away from a support area at $44. Every trader needs to determine when to cut losses if the stock drops in price, but the breakeven point of the trade or the stock’s support area should be considered. It probably makes sense to close out the entire trade (stock and short call) to avoid possible further losses.
At the time of publication, Kmiecik had no positions in the securities mentioned.