Red-Hot HOT Might Be Ready to Cool Down

by John Kmiecik | January 7, 2013 6:30 am

One of the reasons many people become retail traders is because you have the potential to make money virtually anywhere you have an Internet connection. So even if you’re not at work, you still can make a little money day trading … even if you’re on vacation.

Here is a trade idea for a company that might just host you — and your computer — on the road every now and again:

Starwood Hotels & Resorts (NYSE:HOT — $60.38): Long Puts

The trade: Buy the February 60 puts for $1.90 or less.

The strategy: The long put is a strategy that can be used for a bearish outlook on a stock. The trade can profit if the stock falls, and the put premium increases as the option moves further and further in-the-money. Maximum profit is almost unlimited only because the stock can only fall to $0 (which is highly unlikely), and the maximum loss is $1.90 or whatever was paid if HOT finishes at or above $60 at February expiration. Breakeven is $58.10 based on a cost of $1.90 at expiration.

The rationale: Starwood is one of the biggest hotel and leisure companies in the world, with more than 1,100 properties in almost 100 countries. In fact, many of you probably even stayed at one of their properties, which include Westin, Sheraton and St. Regis hotels, among others.

But the real reason behind this trade idea has nothing to do with the fundamentals of the company and everything to do with its stock chart.

Click to Enlarge
HOT has been on a bullish run since the middle of December. Just this past week, Starwood’s stock moved up from around $56 to where it is currently trading and looks to be a bit extended.

Just because it is extended doesn’t mean it necessarily has to reverse … but there is a previous close just below $61 from back in September that might have a say in the matter.

The stock is forming a nice double-top, which can sometimes act as resistance and move the stock lower again — even if for a short period of time.

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

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