During the market’s recent decline, many stocks have dropped considerably in value, which in turn might make them more attractive buy. However, a trader needs to take into account what the overall market is going to do, and decide whether he thinks the market will rally and potentially move the stock higher too.
Here is a trade idea that is somewhat bullish, but it can still profit even if the underlying stock doesn’t move higher.
Linn Energy (LINE — $31.07): Put Credit Spread
The trade: Sell the July 28/30 Put Credit Spread (selling the July 30 put and buying the July 28 put) for 35 cents or better.
The strategy: The maximum potential profit for this trade is 35 cents if LINE is trading above $30 at July expiration. The maximum loss is $1.65 (2 – 0.35) if LINE is trading below $28 at July expiration. Breakeven is $29.65 at expiration based on a credit of 35 cents.
The rationale: Linn Energy is an independent oil and natural gas company. The company has struggled during the past year, posting a return on equity of -15%. However, Linn’s dividend yield has been consistently growing, and currently sits at 9.4%. Natural gas producers in particular have not fared well recently, but according to some analysts, that could be improving.
Click to Enlarge Since the beginning of May, the stock has fallen from just above $38 to where it is currently trading. On Friday, the stock opened traded lower and buyers brought the stock back considerably from where it traded down. This could be a bullish sign that the decline might have ended.
Taking a look at a two-year chart of the stock, every time the stock has ventured lower, buyers have moved the stock higher again — especially when it drops below $32. The IV of the options has increased too because of the decline. The current implied volatility is around 36% compared to the historic volatility, which is about 29%. A nice skew makes selling a put spread a little more attractive.
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.