Call Options Or Put Options On Deere & Company (DE)?

| July 11, 2012 | 0 Comments

DE OptionsDeere & Company (DE) manufactures and services agriculture and forestry machinery.

The company was founded in 1837 and is based in Moline, Illinois. 

DE has been riding high over the last few years.  Their success stems from high prices for agricultural commodities like corn, soybean, and wheat.  The high prices for these commodities have caused US net farm income to surge from $61.6 billion in 2009 to over $98 billion in 2011.   

Obviously, when farmers make more money from the sale of their crops, they have more money to spend on new machinery.  And DE makes some of the best most technologically advanced machinery in the business. 

DE currently trades for $79 per share.  It’s up more than 32% from the 52-week low of $58.92.  But it’s down 11% from its 52-week of $88.66. 

Is this an opportunity to buy call options on DE as it rockets back to its recent highs?  Or should you buy put options on DE as it tumbles back to its lows?

The bulls make a convincing argument…

Right now a massive heat wave is baking the Midwest.  The high temperatures and drought are starting to have an impact on this year’s corn crop. 

In a nutshell, high temperatures are hurting the pollination process.  If the plants don’t pollinate, then they won’t produce corn.

As a result, the USDA has cut their corn yield forecast by a stunning 20 bushels per acre to 146 bushels per acre.

Put simply, falling yields will drastically reduce the supply of corn.  And falling supply means higher corn prices. 

At recent price of $7.50 cents per bushel, farmers around the world are once again poised to rake in huge sums of money this year.  That’s good news for agricultural equipment manufacturers like DE.

But the bears have a compelling case as well… 

Over the last two years, DE has been growing revenue and earnings at an amazing clip. 

Last quarter alone, earnings per share grew 23% year-over-year and net income shot up more than 16%.  Over the past fiscal year, they increased earnings to $6.63 from $4.36 in the prior year. And this year they’re expected to earn $8.25.

But here’s the thing…  DE will likely fall short of these expectations.

Don’t forget, agriculture isn’t immune to slowing economic growth.  And the same fears that are causing other equipment manufacturers to dial back their growth estimates will likely cause sales of agricultural equipment to slow as well. 

If DE delivers a weaker than expected forecast when they report earnings next month, the stock will likely sell off. 

If you think the bulls are right, take a look at buying the DE August 2012 $80 Call for around $2.18. 

If you think the bears are right, take a look at buying the DE August 2012 $75 Put for around $1.65.

***Editor’s Note***  Just as an FYI, my good friend and colleague Gordon Lewis is releasing a new penny stock in his Penny Stock All-Stars portfolio tomorrow. He tells me this stock is a tiny technical services company that should heat-up as the housing recovery rolls on.  Click here for access to the portfolio before he releases the name of this stock.

Good Investing,

Corey Williams

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Category: Call Or Put Options?

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.