Often times, a trader will look at one sector that is doing really well or performing poorly and try to figure out how that might influence a particular company that’s not directly associated with it. This trade idea has the same thought behind it — we want to capitalize on the improving housing market through an indirect route:
Whirlpool (WHR — $132.77): Put Credit Spread
The trade: Sell the Sep 115/120 Put Credit Spread (selling the Sep 120 put and buying the Sep 115 put) for 50 cents or better.
The strategy: The maximum potential profit for this trade is 50 cents if WHR is trading above $120 at September expiration. The maximum loss is $4.50 ($5 – $0.50) if WHR is trading below $115 at September expiration. Breakeven is $119.50 at expiration based on a credit of 50 cents.
The rationale: Whirlpool is one of those companies that is indirectly enjoying the benefits of the resurgence in the U.S. housing market. Last month, WHR reported better-than-expected second-quarter earnings of $2.37 per share from $1.55 in the year-ago period. Whirlpool also said it expects shipments of appliances in North America will continue to increase above earlier predictions.
Click to Enlarge This current choppy market has influenced this trade idea. WHR currently is in an uptrend and broke through a previous resistance level around $130 late last month. With the market pulling back, the stock has come back to its old resistance, which is now support.
A bullish directional play is another option for Whirlpool stock, but the unknown market has made a credit spread a potentially better choice, since it doesn’t require the stock to move higher for the trade to profit.
Besides support at $130, WHR also has the 50-simple moving average just below $125 and another pivot level at $120 that can act as support.
This might be the cleanest trade idea ever!
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities. Get a free trial of John’s live options trading room here.