Stock Options To The Rescue! Harley-Davidson (HOG)

| April 26, 2012 | 0 Comments

HOG OptionsToday we’re going to look at a stock replacement strategy on Harley-Davidson.  It allows you to lock in profits, reduce your risk, and gives you upside potential.

Here’s what happened…

Harley-Davidson (HOG) shares popped more than 7% from $50 to around $53.50 per share after its quarterly revenue and earnings beat estimates and their forecast for the rest of the year was better than Wall Street expectations.

Here’s the deal…

The iconic American motorcycle maker reported quarterly earnings of $0.74 per share.  Earnings were up 45% from last year and $0.02 per share better than expected.

The strong results were driven by a 20% increase in new Harley sales.  Revenue of $1.43 billion came in well ahead of expectations for $1.22 billion.

Additionally, management boosted its full year guidance from 240,000 to 245,000 bike shipments to a range of 245,000 to 250,000.

Here’s the kicker…

HOG had a spectacular quarter.

In fact, it was the best quarter since before the 2008 financial crisis decimated the motorcycle market.

But here’s the thing…

They also benefited from unusually warm weather during the first quarter in many parts of the country.  The nice weather allowed motorcycle riders to hit the road sooner than usual.  And it also gave them a reason to buy their new hog now instead of later.

What’s more, the stock is now at its highest price since 2007.  And it’s up more than 36% this year.

Obviously, anyone who bought the stock at the beginning this month is sitting on some hefty profits.  But there’s a good chance we’ll see profit taking after their amazing quarter.

Instead of hoping for further upside in the stock, consider using options to replace your stock.

Here’s what to do now…

Let’s assume you bought 100 shares of HOG at $47.50 earlier this month.  You’re sitting on a tidy 12% profit.

But with the month of May looming, we could see investors “sell in May and go away”.  Your hard earned profits could evaporate in a hurry.

Selling HOG and buying the HOG June $55 call option for $1.20 is a great way to lock in profits, reduce your risk, and give you upside potential if HOG continues to move higher.

Let’s take a closer look…

Right now you can sell HOG for a $6 per share profit.  That’s $600 in profit on your HOG investment.  And buying the June $55 call option for $1.20 will cost you $120.

In essence, you’re giving up 2.5% of your profits in order to lock in a $440 profit on HOG ($600 stock profit – $120 option price).  That’s still a solid 9.2% profit on your original $4,750 investment.

You’ll be laughing all the way to the bank If Harley-Davidson’s stock comes crashing back down.

Remember, your losses are limited to the cost of the call option, in this case $120.  But your entire profit (and then some) could disappear if HOG falls below $47.50.

But that’s not all…

Your call option also gives the ability to profit if HOG continues to rally.

The breakeven on your call option is $56.20 ($55 strike price plus the $1.20 premium).  So, you’ll get back your $120 investment if HOG closes at $56.20 when you exercise the option on June 15th.  And if HOG is above $56.20, you’ll make even more money.

As you can see, replacing HOG stock holdings with a call option allow you to lock in profits, reduce your risk, and still give 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.