Strike It Rich With Baker Hughes

by John Kmiecik | July 30, 2012 8:18 am

The market showed positive signs of life in the late part of last week, and stocks ended the week much higher. A couple of sectors seem to be coming to life, as well. Earnings reports from the oil-field services providers have been pretty good, and there is one in particular that might be the best of the bunch.

Here is a trade idea that might just help your portfolio strike it rich!

Baker Hughes Inc. (BHI – $47.35): Long Calls

The trade: Buy the September 48 calls for $1.10 or less.

The strategy: Buying a call is an option strategy that can take advantage of a bullish outlook on a stock. A long call can profit if the stock rises and the call premium increases to an amount more than was paid. Maximum profit essentially is unlimited with a long call because the stock can continue to rise, and the maximum loss is $1.10 if BHI finishes below $48 at September expiration. Breakeven is at $49.10 at expiration based on a cost of $1.10.

The rationale: Baker Hughes (NYSE:BHI[1]), the world’s third-largest oilfield services provider, recently reported earnings and surprised most analysts. The company reported net income of $439 million compared to $338 million for the same period last year. BHI’s earnings of $1 per share handily beat most analysts who had predicted it would be at least 20 cents lower. The company was able to hold its own in North America, but really improved revenue in Europe and the Middle East, CEO Martin Craighead said.

Technically, the stock gapped up on Baker Hughes’ earnings announcement over several areas of resistance (previous highs). On Friday, the stock moved higher and was able to close above its 200-day simple moving average — a feat it has not accomplished in almost a year.

A bullish sign would be if the stock can move past the high it set on Friday, which was $47.74. If BHI fails to do this, it might take a breather for a little bit after its extended move up.

As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.

  1. BHI:

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