Trade of the Day: Masco (MAS)

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.