Trade Spreads as DOW Remains Aloft

by John Kmiecik | November 25, 2013 8:29 am

With the holidays fast approaching, you might find you have less time to trade. After all, sometimes it’s difficult to focus on the markets when you have so many other activities consuming your time. However, if you do find a pocket of spare time, this trade idea on Dow Chemical (DOW[1]) might be destined to be put on Santa’s “nice” list in the future.

Dow Chemical (DOW – $39.66): Put Credit Spread

The trade: Sell the DOW Dec 36/38 Put Credit Spread (selling the Dec 38 put and buying the Dec 36 put) for 28 cents or better.

The strategy: The maximum potential profit for this trade is 28 cents if DOW is trading above $38 at December expiration. The maximum loss is $1.62 ($2 – $0.28) if DOW is trading below $36 at expiration. Breakeven is $37.72 based on a credit of $0.28.

The rationale: A few weeks back, Dow Chemical announced that it was going to retire another $500 million in notes. The company has already reduced its debt by almost $2.5 billion year-to-date, which has resulted in about a $129 million decline in interest expense.

This comes on the heels of an underwhelming earnings announcement about a month ago. Dow’s Q3 earnings rose to $594 million (49 cents per share), but adjusted profits of 50 cents per share were 4 cents under estimates.

Click to Enlarge
But really, this trade idea comes down to what the chart is telling us.

At the beginning of September, DOW stock moved over $38, and it has not traded below it since that breakout. Dow Chemical currently is being kept in check by the 50-day simple moving average.

A bullish sign — and a positive for this trade idea — would be to see DOW stock move above the moving average once again. If not, the $38 potential support level (prior pivots) needs to hold.

Another bonus for this trade idea is the options premium. The current implied volatility is above the historical volatility, making premiums a little pricey but good for sellers of options.

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].

  1. DOW:
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