Sell Deere Stock Spreads to Grab Some Green

by John Kmiecik | October 17, 2013 8:00 am

Can this debt ceiling and government shutdown crisis really be over? Well … it is, but it isn’t. The government is open again, but the debt ceiling problem has just been delayed until early next year so everyone can enjoy the holidays. But we have to work with what we’re given, so let’s just enjoy the holidays — by playing this options trade on Deere & Co. (DE[1]) that could put a little green in your pocket just before Thanksgiving.

Deere & Co. (DE — $82.97): Put Credit Spread

The trade: Sell the DE Nov 77.5/80 Put Credit Spread (selling the Nov 80 put and buying the Nov 77.5 put) for 35 cents or better.

The strategy: The maximum potential profit for this trade is 35 cents if DE is trading above $80 at November expiration. The maximum loss is $2.15 ($2.50 – $0.35) if DE is trading below $77.50 at November expiration. Breakeven is $79.65 at expiration based on a credit of 35 cents.

The rationale: Deere & Co. manufactures and sells agriculture equipment and construction and forestry equipment all over the world. The U.S. Department of Agriculture is forecasting that net farm income will grow by 6% by the end of 2013. Since agriculture is a big part of DE’s business, it can be construed as a positive sign for Deere stock.

Speaking of growing, during the second quarter of this year, Deere revenue grew by more than 4% and profit margins reached 15.5% compared to last year. The company is looking to expand into Brazil, which has a demand for tractors and is considered one of the fastest-growing economies in the world. DE also is working on a new tractor that will increase power and at the same time reduce fuel consumption.

Deere stock chart (DE)
Click to Enlarge
Taking a look at the Deere stock chart, DE has pretty much stayed between $81 and $85 for the last four months. Deere stock has not closed below $80 in more than a year, and for the sake of this trade idea, let’s count on that streak continuing.

Deere is expected to announce earnings after November expiration, but the implied volatility still is currently higher than historical volatility. This could be due to the debt ceiling crisis, but whatever the reason, it is a positive attribute for selling a credit spread.

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[2].

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