Many traders have had a difficult time trading in these lackadaisical markets. Some traders have probably anticipated the market falling and have instigated bearish positions only to find the market grinding higher or at least not falling like anticipated. The key for many traders is to show some patience. Here is a trade idea that requires a good amount of patience before a profit can be had.
Allstate Corp. (NYSE:ALL): Diagonal Spread
The trade: Buy the July 46 calls and simultaneously sell the March 47 calls for a net debit of $1.65 or better
The strategy: A diagonal spread involves buying one option and selling another option with a different strike and different expiration month. It is essentially a time spread. The goal in this instance is for the stock to trend slowly up and eventually help pay for the long-term call with the short-term call’s premium received. A perfect case scenario is for the stock to be trading right at the short call’s strike at expiration similar to a covered call strategy but without being long the stock. The process can be repeated until the long call’s expiration.
The rationale: Allstate engages in personal property insurance, life insurance and investment products primarily in the U.S. The company just recently announced earnings last week and Allstate’s revenue growth is below the industry average but so is its debt-to-equity ratio which means it has been successful managing its debt levels compared to its peers. Its net operating cash flow rose almost 69% when compared to the same quarter last year.
Over the past year the stock has been slowly climbing higher except for in the fall of 2012 when the market performed bearishly so did the stock. There is no reason to believe that the stock cannot move higher. The next area of resistance ALL could face is right around $50 which were previous pivot lows from back in 2005 – 2008. If every expiration the short call expires worthless and the stock is trading around $50, the intrinsic value of the long call should be close to $3.
No positions held at the time of publication. If you are interested in more trade ideas from John Kmiecik, please visit at MarketTaker.com.