Stock Options To The Rescue! Honeywell (HON)

| July 19, 2012 | 0 Comments

Honeywell (HON) OptionsToday we’re looking at an options trade on Honeywell to increase your profits, reduce your risk, and generate some cash after the stock jumped higher. 

Here’s what happened…

Honeywell International (HON) closed up 6.7% yesterday.  The shares jumped $3.64 to close at $58.18.  The company’s 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 manufacturing company’s earnings increased 12% from last year.  They reported quarterly earnings of $1.14 per share.  Analysts were expecting them to earning $1.11. 

The results were driven by strong growth in airplane parts.  Sales in their aerospace division jumped 7.7% to $3.03 billion.  And total revenue rose 3.8% to $9.44 billion.

Additionally, management narrowed their full year guidance from $4.35 to $4.55 to a range of $4.40 to $4.55.  

Here’s the kicker…

Honeywell had a great quarter. 

Sales of airplane parts are soaring.  Aerospace companies have accumulated huge backlogs of commercial aircraft orders over the last few quarters.  And now they’re increasing production to work through those backlogs.  And they need more of Honeywell’s parts to make their airplanes.

However, the strong performance in their commercial segment was partially offset by declines in defense spending.

Here’s what to do now…

Let’s assume you bought 100 shares of HON at $54.00 before earnings.  You’re sitting on a solid $418 profit after yesterday’s pop. 

But slowing economic growth and uncertainty are clouding the macroeconomic outlook.  So, it’s a good idea to have some downside protection.

Selling the HON December $60 call option for $2.20 is a great way to generate some additional income and give you some downside protection.

Remember, when selling call options, you immediately collect the premium.  In this case, it’s $220.  That’s a solid 4% of the stock price for an out-of-the-money option. 

If HON is above $60 in December, your 100 shares of HON will be called away or sold at $60.  You’re out of the stock with a $600 gain on the stock plus the $220 option premium.  That’s good enough for a solid 16% profit.   

However, if HON is below $60 when the option expires in December, the call expires worthless and you keep the stock and the option premium.  And you’ve protected more than half of your gains by collecting the option premium.

Here’s the best part…

If your stock isn’t called away, then you can sell another call and collect another premium.  And you can do this over and over again…

As you can see, selling a covered call against your stock holdings can increase your profits, reduce your risk, and generate a stream of income.

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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.