Is it crazy to place a somewhat bullish trade on a stock that has been sliding lower? It might be if there isn’t a reasonable reason to think the stock may reverse. But with options, a trader can profit even if the stock doesn’t perform in a bullish manner. Here is a trade idea that can profit from a potential bullish move but also from a neutral move as well.
Joy Global Inc. (JOY): Put Credit Spread
The trade: Sell the August 45/47 Put Credit Spread (selling the August 47 put and buying the August 45 put) for 50 cents or better.
The strategy: The maximum potential profit for this trade is 50 cents if JOY is trading above $47 at August expiration. The maximum loss is $1.50 ($2 – 50 cents) if JOY is trading below $45 at August expiration. Breakeven is $46.50 at expiration based on a credit of 50 cents.
Click to EnlargeThe rationale: Joy Global manufactures and services mining equipment for extracting coal, copper and other minerals. The company has struggled with weak earnings growth and thus finds its stock price struggling to move higher. There are still rumors that the company is a potential takeover target even though the mining industry as a whole has been suffering. Is the stock oversold?
The stock is trading at almost the same level it was about a year ago which makes this area potential support. Numerous times over the past year the stock has been able to reverse off the $48-$50 area and move higher. JOY has not traded below $47 since the middle of 2010. Choosing to sell a credit spread is one way to capture potential profit from a reversal or if the stock moves sideways. The current implied volatility is higher then historical levels which makes selling options a prudent option.
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