E I Du Pont De Nemours And Co (NYSE:DD) stock is in strong 12-month uptrend, and I want to use this momentum to generate income. I actually find it easier to identify areas where DuPont stock is not likely to go than it is to chase a price target.
Fundamentally, DuPont is diversified enough, so it’s less susceptible to single headline shocks. Its price-earnings ratio is on the high side of its peers, but not outrageously so. Analysts that cover it are spread evenly between buys and holds, so there is no added risk there.
What’s more, DD is a dividend payer, and those could find some downside pressure from rising rates. Even more risk comes from the markets in general, as equities are near all-time highs, which adds risk to all stocks. But the DD dividends would lend support in periods of market corrections.
That said, DD looks like a good bet long. But today, I will only use that fact to finance a near term bearish trade on DuPont shares. Consider this a short against its price action, not its fundamentals.
The Bet: Buy DD April $77.50 put for 98 cents per contract. The faster and sooner that DD stock falls through my strike the more profits I accrue. The price I pay to enter this trade is my maximum potential loss. To lower my out of pocket risk I will sell risk against DD levels I deem safe.
The Bank: Sell DD Jan 2018 $55 put for $1 per contract. By selling this put, I am committing that I am able and willing to own shares at that price if DD stock falls below it. With a 30% buffer from current price I have a 90% chance of theoretical success on this leg. For less risk, I could change the sold put into a credit put spread. Ideally I need DD stock to correct before April but stay above my sold put. So if DD stays above $55, any premium I collect by closing my April puts would be pure profit.
I am not obliged to hold my options trades open through their expiration. I can close any of them for partial gains or losses at any time. I never risk more that I can afford to lose.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.