It can be easy to get wrapped up in the day-to-day, minute-to-minute drama unfolding in Europe. But it is important to keep an eye on the situation at home, which, thankfully, is a lot more uplifting.
Corporate profits are at an all-time nominal high, and consumer confidence is surging. This optimism is manifesting itself in demand for durable goods, which were too expensive to buy during the recession.
A great stock poised to profit from this is Navistar International Corp. (NYSE:NAV). This company manufactures and markets medium and heavy trucks, school buses, mid-range diesel engines and service parts. And yesterday, a Goldman Sachs analyst upgraded the stock to �Neutral� from �Sell.�
To gain exposure to Navistar we recommend a buy-write trade. This involves buying the stock for $37 and selling the NAV Jan 40 Call against it. The Jan 40 Calls are trading at a 47.5% implied volatility, which means that there are juicy premiums to be had by selling them.
Should Navistar close above $40 at January expiration, the trade will return 12.40%. If Navistar does not, the premium received from selling the call is yours to keep and effectively lowers your basis in the stock by $1.40.
The bottom line is that this trade increases the odds of achieving above-market returns while simultaneously reducing downside risk. That is a win-win situation, in our book.
Here are the details of this trade idea:
Stock/Index:� NAV
Stock Price:� $37
Option Play:� Covered Call
Buy Stock:� 100 Shares @ $37
Sell Call:� NAV Jan 40 Call @ $1.40
Net Cost:� $35.60 = $37 � $1.40 (Net Cost = Stock � Premium Received)
Breakeven:� $35.60 = $37 � $1.40 (Breakeven = Stock Price� Premium Received)
Max Profit:� $4.40 = $40 + $1.40 � 37.00 (Max Profit = Strike Sold + Call Premium � Stock)
Max Loss:� $35.60 = $37 � $1.40 (Max Loss = Stock � Call Premium)
Call Away % Return: �12.40% = $4.40/$35.60 (Call Away Return Max Profit / Net Cost)
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