Trades

April/May 2011 Earnings Season w/ Deere Collar Trade

Earnings season is the six weeks when the majority of S&P 500 quarterly corporate earnings are released to the public.  Earnings season is almost over and I want to recap the stocks I played through the earning season.  Overall the earnings beat 80% plus which is outstanding.  Companies have become slim and trim.  Great earnings and good future expectations call for a higher year end than where we are currently at.  Companies are hiring!!!  Earnings are great, growth is in the future and companies are terrific.  The speculation is definitely is worry about the governments now. 

Our problem lies with the governments.  What will taxes be two years in the future?  Companies look out to a 5 to 15 year time frame.  Is oil and other commodities way over priced?  It would seem so based on the last weeks decline.  Are the little middle east oil producers really that important with their smaller amounts of oil?  Not so much to the US but we are becoming a world economy where everything seems to matter in regards to stock market growth.  The real question is whether the US will default on their loan payments?  If we do we can kiss our reserve currency status goodbye.  Why is it so important you may ask?  We do not incur the simple exchange rate costs with buying our commodities across the world. Everyone uses, purchases, and buys based on our US dollar. It saves us about 20% in the cost of EVERYTHING !!!  For this reason I have been in Blue Chips that seem to have an international exposure to some of their products.  Let’s see how they are doing

 AAPL: great earnings with great guidance.  Billions in reserves to help grow the company in new areas to increase revenue streams.

 BA: Great earnings, with the tanker bid ensured.  The dream liner is on plan to be delivered and as long as the US doesn’t default BA has billions to work with. 

 BIDU:  Once again the Chinese google kills earnings and then gave tempered guidance.  They took quite a killing due to profit taking.  They should continue to run to the upside. 

 CAT:  Huge growth with guidance letting us know they have a huge amount of orders as third world countries grow.  Infrastructure is growing worldwide and CAT owns a big piece of it.

 DE:  Deere is Cat’s little brother and they go hand in hand.  Earnings are in 2 weeks and they should report similar earnings to CAT.  SEE the collar trade below.

 GOOG:  A good earnings with bad guidance has caused a 10% drop that is currently filling the gap back up. 

 F:  Ford had great earning with good guidance but they have fallen.  I do not have an explanation on why at this time other than the fact they didn’t announce a 13 Billion dollar tax break for new plants being constructed.

 NVDA:  On the earnings and quantity that AAPL announced for their earnings where they should shine.  Last quarter great earnings, great guidance, and great ratios didn’t earn the company a run up.  Sentiment and market expectations can pull down even the best of companies.

 SNDK: Good earnings and good guidance gave them a move up until the market brought down the semiconductor sector. 

 V: is our anomaly.  Good profits and meet earnings expectation.  Bad guidance and worry about the new regulations that may cut their profits in half.  So up they go on even a bad day in the market. 

 Market sentiment is very hard if not impossible to overcome.  When the market is going down 80% plus of stocks are also going down.  Markets don’t move straight up or down ever.  We will do the best we can to protect to the downside and make up some of the downward movement.  Anything we make to the downside profits us on the way back up and it lets us sleep at night knowing we won’t lose half of the value of the portfolio over night.  

– DE – 04-27-11 – Collar Trade


STRATEGY: DE Collar Trade
BTO

: DE  @ $97.00 – Qty 1000
BTO:

 97.50 Sept 11 Long Put @ $6.85 – Qty 10
STO:

110 Sept 11 Short Call @ $1.75 – Qty 10
 
Max Risk: $4.60


Max Reward without Adjusting: $7.90


Exit Points:
Primary Exit = GET Called out
I may add short puts against the long put position in a bull put calendar scenario if the stock takes off
 
Secondary Exit – PICK UP MORE SHARES !!!  At a bottom I will cash in
the long puts and the short calls to add shares to the position for the
next earning.  I plan on having to re-collar the trade before the
earnings in Aug.
 
Fundamentals:
BRIEF:
For the three months ended 31 January 2011, Deere & Company’s
revenues increased 27% to $6.12B. Net income totaled $513.7M, up from
$243.2M. Revenues reflect an increase in income from Agriculture &
turf sales and higher income from Construction & Forestry segment as
a result of higher shipment volumes. Net income also reflects a
decrease in interest expenses and lower other operating expenses. http://www.deere.com/
 
Technicals:
Technically the DE is bullish in the RSI and the 5,20 Day EMA.   The
MACD is about to cross but this is an earnings play.  I also have the On
Balance Volume (OBV) indicator.  It shows the institutional money flow
into a stock.   
Summary:
I am placing this because the numbers add up.  I like the almost two to
one reward to risk ratio.  I chose the collar trade because I am
trading DE for the first time and they have earnings in the near
future.  The stock has traded higher and can definitely continue to
move.  If the market pulls it down I plan on taking stock ownership. 
The MOST I could lose is $4.60 and I could let the positions stay in
place for the next earnings after May’s.

Here are the actual numbers when the order filled 04-28-11

So let’s rework the numbers
BTO 1000 shares of DE = 96.62 per share = Risk in trade
To Lower my risk in the trade I BTO a Long put
BTO 97.50 Sept 11 Long Put for 7.05 Debit
New Cost Basis for the trade= stock 96.62 + 7.05 Long Put = $103.67 per share
New Risk in the trade = 103.67 – 97.50 right to sell= $6.17 or 5.9% of Total Invested Capital (TIC)
To Lower my risk even more I sold a short call
STO 110 Sept 11 Short Call for $1.60 credit
Overall Risk in the trade = 6.17 – 1.60 = $4.57 per share or 4.4% TIC
Max Reward without adjusting = $7.93 per share
Reward to risk ratio = 7.93 / 4.57 = 1.73 rewards for every risk !!!

05-06-11

I still think DE is going to knock the cover off the ball so
to speak with their earnings next week.  I decided to roll the LP down
to a 92.50 to capture profits on the97.50 long puts. Let’s revwork the
numbers.:

Let’s look at the new collar and rework the numbers:

Let’s start with the stock at a cost basis of $96.62 
I booked $1919.50 or $1.915 per share to lower the cost basis down to $94.70
BTO Long Puts @ 92.50 for $6.45
New cost basis = 94.70 + 6.45 = $101.15
New risk in the trade = 101.15 – 92.50 = $8.65
STO ORIGINAL 110 Sep 11 Short Call (still in place) for $1.60
OVERALL Risk in Trade = 8.65 – 1.60 = $7.05

Why would I do this?  I am VERY bullish on DE and now increased my profit potential to 110 – 101.15 + 1.60 = $10.45
Increase of $2.60 more risk for $3.50 more reward in the trade.
With more reward comes more risk and I hope I am not wrong. 

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19 comments

payroll May 9, 2011 at 3:47 pm

I definitely think that the what is happening with the economy and earnings is a direct hit to peoples payrolls. I also think that it has a lot to do with the governments! Taxes are increasing, people are not getting paid anymore, the price of oil is going up, which in turn makes the price of groceries and other necessary goods go up. It’s reassuring to see trade and markets doing well! Hopefully that will have a direct impact on peoples pay from companies!

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