Trade of the Day: Ericsson (ERIC)

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I’m not sure the use of “market cross-currents” does justice to describe this week’s tape. As Monday’s session showed, rotation out of the tech-led Nasdaq and into high-quality, dividend-paying names couldn’t be more pronounced. There is some real nervousness about how the Fed will lay out its policy statement when it is released at 2 p.m. EST on Wednesday following a two-day FOMC meeting.

Market participants are waiting with bated breath as to whether the Fed will remove the language of “considerable time before raising short-term interest rates” and if it shapes a new attitude by the central bank. It’s a bit of a coin toss in that prior to the recent weak employment data and today’s softer industrial production reading for September (-0.1% vs. the 0.3% forecast), the data were solidly higher.

Looking forward, it’s a busy week ahead chock full of more data, the biggest IPO in history with Alibaba going public on Friday and the Fed rate decision. Given how Janet Yellen has positioned herself in her most recent speeches, it would be surprising to me if she made any changes to her dovish stance until there is clear improvement in the labor markets. As such, I believe the glass will remain half full for the market as a whole, though not without some bumps in the road – which provides opportunities to sell some put premium back to the market.

My recommendation for you today is one such naked-put trade, in Ericsson (ERIC).

Based out of Sweden, ERIC is a major provider of telecommunications equipment and services to the wireless and fixed network operators. As networks around the globe upgrade to 4G LTE to handle smartphone data and increase access to Internet content, demand for Ericsson equipment from rising capital spending is boosting the prospects for ERIC shares.

The stock jumped on the latest earnings report after Ericsson provided robust forward guidance, and with its 3.6% yield, ERIC did much better on Monday than the larger Nasdaq. Money flow is very positive, as is the long-dated purchase of call options, which signals further upside over the near term.

The stock has, in my view, a chance to challenge $14 in the next technical phase higher. I recommend that you trade this by “selling to open” the ERIC Oct. $14 puts at $1.30 or more per contract, good till canceled. The option’s ticker is ERIC141018P00014000.

For every 1 put option you sell, you would be responsible for purchasing 100 shares’ worth of the underlying ERIC stock from its buyer if they decide to exercise the option. That is not our goal, but it is a possibility — so make sure you have enough cash or margin on hand to cover that number of shares.

On the other hand, if ERIC even gets close to our $14 strike, traders can book a very nice gain of at least 50% or more when “buying back to close” the naked puts. And should ERIC shares rise above the $14 strike price by October option expiration, an up move of about 10% from current levels, then the put option will expire worthless to its buyer. (After all, who’d want to sell you ERIC shares at $14 when he or she could get a better price in the open market?)

What that means for you as the put seller is that you’d be able to keep 100% of the $1.30 premium you collected upfront…all without ever touching any ERIC shares.

Bryan Perry is the editor of Cash Machine, a newsletter focused on high-yield income investing with the goal of maintaining a blended total yield of 10% across two portfolios. And most recently, Bryan introduced Cash Machine Trader. With this service, he’s increasing the income stream potential even further by using covered call writing strategies to generate yield in the form of option premium — on top of capital appreciation income from well-known stocks.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/nasdaq-trade-of-the-day-ericsson-eric/.

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