by John Kmiecik | December 13, 2013 9:11 am
The market has declined during the past few sessions, pulling many stocks lower. But naturally, just because a stock has lost value doesn’t mean it won’t ever move higher again (and thank goodness for that). But there are certain criteria that, when met, can improve the odds of a rebound. move higher again. Here is a trade idea on Travelers Cos. (TRV), which has met some of the criteria.
The trade: Buy the Jan 85 calls on TRV stock for $2.90 or less.
The strategy: A long call strategy is implemented when a trader has a bullish forecast. The trade can profit if the stock moves higher and the call premium increases to an amount more than was paid. Maximum profit is theoretically unlimited because TRV stock can continue to rise, and the maximum loss is $2.90 or whatever was paid for the option if TRV finishes below $85 at January expiration. Breakeven is $87.90 at expiration based on a cost on TRV stock of $2.90.
The rationale: Travelers provides insurance products and services to both individuals and businesses, primarily to customers in the U.S. The Dow Jones Industrial Average component has produced solid returns for investors in the lucrative property and casualty insurance market. 2013 has been a relatively non-destructive year (as far as storms go). Of course, this mild weather can’t be counted on every year, so Travelers has taken some measures to diversify itself. For instance, just last month, TRV completed its buyout of a Canadian insurance company. Meanwhile, favorable interest trends in the coming year also could help the company by boosting its bond portfolio value.
Click to Enlarge Taking a look at the TRV stock chart, we can see a possible reversal setting up at two potential support areas. There is an upward-sloping trendline that TRV has traded down to, and at that trendline is the 50-day simple moving average as well. Both of these support areas can be potential reversal areas.
A bullish sign for TRV stock would be if the high ($87.37) of the reversal candle is surpassed in the next couple of sessions. Travelers shares have pulled back several times in the past, and often have rallied past the previous pivot (significant) high. If TRV stock never moves over that level, it might be headed lower and could drop down to the 200-day simple moving average that is lurking a few dollars below.
Travelers’ commercials might not be as funny as Geico’s, but TRV stock still might be able to put a smile on your face.
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities. Get a free trial of John’s live options trading room here.
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