Stock Options To The Rescue! Acuity Brands (AYI)

| July 5, 2012 | 0 Comments

Acuity Brands (AYI)Today we’re going to look at a stock replacement strategy on Acuity Brands (AYI).  It allows you to lock in profits, reduce your risk, and gives you upside potential. 

Here’s what happened…

AYI shares have jumped 19% from $50.50 to over $60.50 after its quarterly revenue and earnings beat Wall Street estimates.

Here’s the deal…

The lighting solutions maker reported quarterly earnings of $0.82 per share.  Third quarter earnings were up 32% from last year and $0.03 per share better than expected. 

The strong results were driven by excellent performance of their core business.  Net sales increased 6.4% year-over-year to $487.5 million.

Here’s the kicker…

AYI obviously had a great quarter.  And the stock has made a big move over the last few days. 

But don’t forget, past performance isn’t going to keep this stock moving higher.  Now it’s all about what they’re going to do this quarter and on into the future. 

Will they be able to keep it up?

On one hand, they’re benefiting from strong non-residential construction demand for their products.  And home remodeling and renovations are driving growth as well.  So there are some positive catalysts that could drive the stock higher.

But on the other hand, the entire macroeconomic picture is full of uncertainty.  As AYI’s CEO Mr. Nagel put it, “we do see the potential for continuing volatility in demand due to the weak pace of economic recovery in the United States and globally.”

Here’s what to do now…

Obviously, anyone who bought the stock ahead of earnings is sitting on hefty profits.  But in this uncertain market, it’s a good idea to take profits when you have them.  Instead of hoping for further upside in the stock, consider using options to replace your stock.

Let’s assume you bought 100 shares of AYI at $50.50 before earnings. At a recent price of $60.50, you’re sitting on a 19% profit. 

Selling AYI and buying the AYI November $65 call option for $3.10 is a great way to lock in profits, reduce your risk, and give you upside potential if AYI continues to move higher.

Right now you can sell your AYI stock for a $10 per share profit.  That’s a $1,000 profit on your AYI investment.  And buying the November $65 call option for $3.10 will cost you $310.

In essence, you’re giving up 28% of your profits in order to lock in a $690 profit on AYI ($1,000 stock profit – $310 option price).  That’s still a solid 13.6% profit on your original $5,050 investment.

Remember, your losses are now limited to the cost of the call option, in this case $310.  But if you held onto the stock and the macro economy falls apart, your entire profit and then some could disappear. 

And the call option still gives you the ability to profit if AYI continues to rally. 

The breakeven on your call option is $68.10 ($65 strike price plus the $3.10 premium).  So, you’ll get back your $310 investment if AYI closes at $68.10 at the November options expiration.  If AYI is above $68.10, you’ll add to your profits.

As you can see, replacing your AYI stock holdings with a call option allows you to lock in profits, reduce your risk, and still gives you upside if the stock continues to rally.

Good Investing,

Corey Williams

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Category: Stock Options To The Rescue!

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.