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Trade of the Day: Southwestern Energy (SWN)

Though I think the lows are in for the time being, I expect the market to consolidate this run

Between soft retail sales, lousy jobs numbers and now Tuesday’s release of the lowest reading of home builders’ confidence since the measure was first recorded in 2006, it has become the mantra for the current market rally to blame any and all bad news on the winter weather.  There’s no question the pounding that Old Man Winter has given to buying stocks, business conditions, consumer spending, travel and supply-chain management. Heck, most online orders for Valentine’s Day came in two days late — but what can you do when there’s so much snow that you can’t even get to the market for a gallon of milk?

So, the economy has been hunkering down, but market optimists fully expect that the economic data will firm up big time when the storms pass sometime later this month or maybe in early March. At least, that’s the latest read from the weather pros. Fed Chair Janet Yellen has also assured market participants that any notable slippage in economic growth would trigger fresh fiscal stimulus, reversing the taper.

Adding to the positive tone is M&A. As long as there are mega deals being announced on what are known as “merger Mondays,” the bulls can argue that there is tremendous value in high-quality equities at current valuations. Last week was Comcast (CMCSA) acquiring Time Warner Cable (TWC) for $45 billion, and Tuesday’s announcement that leading generic-drug maker Actavis (ACT) will take over Forest Laboratories (FRX) for $25 billion just stokes the animal spirits for more equity exposure.

Against the backdrop of this Wall Street buying stocks party, the Nasdaq has shot to a new multi-year high of 4,265 and is now about 15% away from its all-time high of 5,132 set back on March 10, 2000. I wonder if the current atmosphere isn’t taking on a similar tone when I see the CBOE Volatility Index (VIX) trading back down to within a couple points of the all-time low.

Meanwhile, the S&P 500 is trading back up to within 10 points of its all-time high, and the Dow is about 450 points below its all-time high set in early January. The current leadership would suggest that the big-cap “New America” tech and biotech stocks are in charge of the upward momentum. That group includes stocks like Google (GOOG), Biogen Idec (BIIB), Amgen (AMGN), (PCLN), Apple (AAPL)…and the list goes on.

Better-than-expected fourth-quarter GDP and trade figures from the eurozone along with a more positive report on business lending trends out of China have only fueled more market-upside gusto, which continues to buttress the rally that has all but erased the five-week slide that has now proved to have been one heck of an opportunity for buying stocks.

But I can’t help but to notice how this rally is not at the expense of the bond market in any way, shape or form. In fact, bond yields heading lower Tuesday in aggressive fashion, with the 10-year Treasury yield back down under 2.7%.

Something is amiss among all the champagne bubbles, but fighting the tape on the short side has proved painful for those who have taken that side of the trade. So, I continue to recommend short-term covered calls as a safer strategy for buying stocks. It’s a way to nimbly play any pops in this market while also maintaining some downside protection.

I focus my short-term covered call strategy on names that are set to move quickly; it’s a great way to get paid twice when a stock pops. First, you get paid right away when you sell to open a call against your shares and collect the premium. Then, you get paid again when the stock moves higher than your cost basis and your shares get “called away” at a profit.

I’ll walk you through a short-term covered call trade based on a stock that’s set to profit from the winter weather to show you exactly how to get paid.

Get the trade details now.

Southwestern Energy (SWN) is an institutional favorite in the oil and gas business. Based out of Houston, the company is gearing more of its production to natural gas, where the future is brightest for domestic energy.

Management gave solid guidance on Jan. 28 and has good sponsorship from the analyst community. My view is the shares, after having broken out above $40, can trade to $46 as the weather in the U.S. stays freezing cold while the middle-east strife is getting hot after the United States and France agreed to enforce sanctions on Iran.

Recommendation: For every 100 shares of SWN you own or purchase at market, use a limit order to sell to open one SWN March $46 call at 50 cents or more per contract.

SWN is currently trading just under $43, so we’ll assume you buy shares at the $43 level. Then you sell to open one SWN March $46 call for 50 cents ($50 per contract).

If SWN closes above the $46 strike price at options expiration on March 22, as I expect it to, the shares you bought at $43 will be “called away” for $46, plus you get to keep the $50 premium you got from selling the calls.

On March 22, your potential called-away return is 8.1%. Pretty good for just a few weeks in the midst of a volatile market.

Short-term covered calls are a great way to play these kinds of Teflon market moments in which all material news is viewed as either bullish or shrugged off as weather-related. This trend can carry the market higher, which will force widespread short-covering from these levels. That’s how it works when half of the trading world doesn’t believe the rally is valid or will stick.

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