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3 Option Strategies for Dow Earnings

cat caterpillar logo homepageThe going has been rough for the Dow Jones Industrial Average (DJIA) during the past several weeks, as poor economic data from overseas is hamming U.S. stocks. The blue-chip barometer has had quite a few positive drivers at home, however, with a string of positive corporate reports among them. For instance, 3M Companies (NYSE:MMM) reported a 6.7% increase in first-quarter earnings to $1.59 per share ahead of the open this morning. Looking ahead, fellow Dow components Boeing Co. (NYSE:BA), Caterpillar Inc. (NYSE:CAT), and Exxon Mobil Corp. (NYSE:XOM) are on the docket this week.

Boeing Co. (BA)

Aerospace giant Boeing will step onto the earnings stage tomorrow morning, with analysts forecasting a profit of 96 cents per share on revenue of $18.45 billion. In the same quarter last year, Boeing posted a profit of 78 cents per share on sales of $14.91 billion.

Historically, the company is on solid fundamental footing, with Boeing beating Wall Street’s expectations in each of the prior four reporting periods by an average of more than 25%. The whisper number is currently indicating a first-quarter profit of $1.10 per share.

Sentiment toward Boeing is mixed, as investors digest the company’s strong fundamentals and poor short-term price action. For instance, brokerage firms, which typically take a long-term outlook, have doled out 22 “buy” ratings, compared to nine “holds” and one “sell.”

Short-term options traders, however, are focused heavily on bearishly oriented puts. Specifically, BA’s weekly April put/call open interest ratio of 0.85 indicates that puts are nearly in parity with call options. Since options traders tend to be more optimistic, especially ahead of earnings events, this skew toward puts points toward pre-event pessimism from this speculative crowd.

A bit of pessimism is healthy, however, and could work in BA’s favor if the company can pull off another stellar quarter. Technically, the shares have retreated in recent weeks, slipping toward support near their 50-week moving average in the 70 region. Overhead resistance, meanwhile, lies at the $75 level — an area that has held BA in check since December.

Traders looking to take a bullish stance ahead of earnings may want to consider a BA May 72.50/75 bull call spread (buying the lower-strike call and selling the higher-strike call at a net debit). This trade was offered at $1.02, or $102 per pair of contracts, at the close of trading on Monday. Breakeven lies at $73.52, while profit maxes out at $1.48 if BA closes at or above $75 when May options expire.

Continue reading for two more options trading ideas…

Caterpillar Inc. (CAT)

Earnings expectations appear to be high for Dow construction equipment guru Caterpillar. The company will follow Boeing into the earnings confessional tomorrow morning, with analysts forecasting a 15.7% rise in first-quarter earnings to $2.13 per share. Revenue is expected to increase nearly 25% to $16.18 billion.

What’s more, Caterpillar is also expected to see growing demand in China, as well as increased demand from cleanup efforts in Japan. Likely due to these overseas factors, the Caterpillar’s whisper number is for a profit of $2.32 per share.

Like Boeing, long-term sentiment for CAT is quite bullish, as the brokerage community has doled out 18 “buys,” eight “holds,” and no “sell” ratings. Should Caterpillar revise its full-year outlook or issue a guidance warning, this bullish configuration leaves the stock vulnerable to potential downgrades.

Short-term speculators, however, have taken a bearish stance ahead of CAT’s quarterly earnings report. In fact, the stock’s weekly April put/call open interest ratio has risen to a reading of 1.26 as traders load up on CAT puts. Peak weekly put open interest lies at the 100 strike, totaling 2,093 contracts, while another 1,307 puts reside at the April 105 strike.

Technically, CAT is in the process of rebounding from key psychological support at the $100 level, though market headwinds and resistance at its 50-day moving average have stalled the stock’s advance. A strong showing tomorrow morning could help CAT overcome this technical hurdle.

Traders looking to benefit from a post earnings rally might consider a CAT May 105/110 bull call spread. This trade was last asked at $2.48, or $248 per pair of contracts, on Monday. Breakeven lies at $107.48, while the maximum profit comes in at $2.52, or $252 per pair of contracts, if CAT closes at or above $110 when May options expire.

Exxon Mobil Corp. (XOM)

Last, but certainly not least, is oil baron Exxon Mobil Corp. There has been much speculation as to whether high crude prices will boost earnings for the major oil companies, but Exxon has a couple of aces up its sleeves. First, the company could benefit from investments in Russia, which have helped shield Exxon from Middle Eastern turmoil. Second, the company is the largest natural gas producer in the world, and new prospects on this hot commodity could prompt Exxon to lift guidance.

For the quarter, analysts are projecting a 2.3% decline in earnings $2.09 per share. Still, these projections have risen from $2 per share during the past three weeks. Revenue is seen rising 11.5% to $127.1 billion. Historically, Exxon has missed expectations twice and matched the Street’s views twice in the prior four reporting periods.

As with most blue-chips, Wall Street analysts are quite bullish on XOM, issuing 12 “buys,” nine “holds,” and no “sell” ratings. The 12-month price target rests at $94 – a premium of only about 9.4% to yesterday’s close.

Options traders are not quite so confident in XOM, as the stock’s weekly April put/call open interest ratio arriving at 1.44, with puts easily outnumbering calls in this speculative options series. Most of XOM’s April put open interest resides at the 85 strike, numbering 3,164 contracts. On the call side, the April 85 strike sports open interest of 1,650 contracts, while another 1,182 contracts are open at the 87.50 strike.

The technical picture is a bit murky, with XOM struggling to reclaim former support at the $85 level. The shares are currently pinned between their 10-day and 20-day moving averages, while long-term support doesn’t materialize until the $80 level, which is home to the stock’s 50-day moving average.

Hype surrounding high crude prices should be a point of concern for XOM traders, and following the bearish options crowd at this point might seem like a good idea. Along those lines, a XOM May 85/80 bearish put spread could be profitable (buying the 85 put and simultaneously selling the 80 put for a net debit). This trade was offered at $1.09, or $109 per pair of contracts, at the close on Monday. Breakeven lies at $83.91, while a max profit of $3.91, or $391 per pair of contracts, is achieved if XOM closes at or below $80 when May options expire.

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