Trade of the Day: Masco (MAS)

MAS is both volatile and liquid, two important characteristics of profitable options trading

   

The monthly Canadian building permits report comes out tomorrow, which could affect homebuilders and homebuilder supply companies that operate in the country. Masco Corporation (NYSE:MAS), a manufacturer of brand-name home products like Delta and Behr, is one of those companies, and my Power Options system has identified an undervalued call option that could make a move on the news.

Though the company is headquartered in the United States, Masco has a plumbing solutions company that manufactures and distributes plumbing products to a Canadian market. It may not be the most glamorous part of Masco’s business, but plumbing products generated 39% of the company’s revenue in FY2011 (the most recent data available).

My Power Options system has identified Masco as a stock that is both volatile and liquid, two important characteristics of profitable options trading. The following option has shown a strong buy signal.

Recommendation: Buy MAS Feb. $18 call options at 65 cents or lower, when the stock price is around $17.30. After entry, take profits if the stock price hits $19.00 or the option price reaches $1.60. Exit if the stock price closes below $16.40 or the option price falls to 40 cents.

This trade has a 23% probability of reaching the $1.60 profit goal. That may seem low, but 20% is about average for low-cost options. Plus, we calculate the probability that the option will hit its target price; the probability of returning a smaller profit is higher.

Also, our computers calculate probabilities assuming a random market. So a call option with a 20% probability really has a 40% probability in a bull market, and a zero percent chance in a bear market. The opposite is true for a put option. It has twice the probability of reaching its target price in a bear market, and a zero percent chance in a bull market.

InvestorPlace advisor Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.  Try Maximum Options today for 2 months for only $99.


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