Buy the Sweet, Soothing Options of Hershey

by John Kmiecik | April 8, 2013 9:09 am

Buy the Sweet, Soothing Options of Hershey

What a crazy market we saw last week. Volatility in U.S. stocks has suddenly crept up, and once again traders are not sure what to make of it. Still, some stocks seem to be unaffected by uncertainty in the market compared to others.

Here is a trade idea on a company that produces products that have been known to soothe problems in the past — including volatile markets.

Hershey (NYSE:HSY — $85.44): Long Calls

The trade: Buy the August 85 calls for $3.20 or less.

The strategy: The long call is probably the most basic strategy in options and is used for a bullish outlook on the underlying stock. In this instance, the trade can profit if Hershey rises and the call premium increases to an amount more than was paid. Maximum profit is unlimited because HSY can continue to rise, and the maximum loss is $3.20 or whatever was paid if HSY finishes below $85 at August expiration. Breakeven is $88.30 at expiration based on a cost of $3.20.

The rationale: Hershey is the largest chocolate-maker in the United States. The company is well-known and diversified in the candy business, including brands like Reese’s, Twizzlers and (of course) Hershey’s Kisses. For the past several years, the company has increased its advertising budget, which has apparently paid off. Hersey has a five-year earnings growth rate of more than 25%.

HSYchart2 300x134 Buy the Sweet, Soothing Options of Hershey
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Examining Hershey’s stock chart, it’s apparent that investors have liked they have heard. The stock has climbed from below $40 at the beginning of 2010 up to where it is currently valued. Since the beginning of April, however, the stock has pulled back and has formed a buy setup. A buy setup is triggered if the stock trades above the previous day’s high and still manages to stay above a support area.

HSY is right at the support area, so a bullish sign would be if the stock can trade above Friday’s high — which was $85.73 — without dropping much lower.

Chocolate, anyone?

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

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