Trade Summary: July 14, 2014

| July 14, 2014

July 14, 2014

 

 Trade Rationale

Let me start by saying this: I don’t believe we’re due for a market correction anytime soon. Despite the very long bull market and the record highs in equities, I’m just not that worried about a major selloff. Sure, we’ll see some downside at some point. But, I don’t believe it will be sustained.

The thing is, the domestic economy is doing very well. That should bode well for many US companies. However, there is certainly some international risk as we saw last week with the Portugal bank missing a bond payment. It probably won’t be the last scare we have regarding overseas risk (or the last time investors get spooked into selling stocks).

With that being said, we’re going to design a trade theme based around investors moving into safer stocks (and out of risky names). Our primary guideline for this theme is beta. We want to buy into some very low beta stocks that won’t get creamed if investors bolt.

We’ll also take a short position in a high beta stock that looks to be overvalued.

First off, we’re going to buy calls on FirstEnergy (FE). FE is an electric utility which is down a bit due to hurricane season out East. However, we’re getting October options, so we have plenty of time for the stock to recover. It’s also extremely low beta, offers a dividend, and looks cheap from a valuation perspective.

Next, we’ll grab calls on Dollar General (DG). DG, as you probably know, is a discount retailer. These companies tend to be stable despite overall market conditions. The stock is also down recently due the CEO stepping down. That should be a short-term pullback.

For DG, we’re using August calls. I like to go out at least two months on options, but in this case we didn’t have a choice. The next available options are November expiration and they’re too expensive.

Finally, we’re buying puts on SunEdison (SUNE). SUNE is a silicon wafer developer focusing at least in part on the solar industry. I actually like SUNE overall, but it’s an extremely high beta stock which a ridiculous valuation. I think the stock is due for a significant pullback.

For the details of each trade, continue reading below.

 

Trade Details

#1) Buy FirstEnergy (FE) October $32 Calls up to $1.35

In this case, we’re looking for a higher move in FE. Our first profit point for conservative traders is at $33.50. For aggressive traders, you can hold up to $35.50. For risk control, the conservative exit level is $30. $28 is the final exit level for aggressive traders.

FirstEnergy

#2) Buy Dollar General (DG) August $57.50 Calls up to $1.75

Like FE, we want DG to go higher. Our first exit point for conservative traders is at $59. For aggressive traders, you can hold to $62. For risk control, the conservative exit level is $54. And, $52 is the final exit level for aggressive traders.

Dollar General

#3) Buy SunEdison (SUNE) October $23 Puts up to $2.80

For SUNE, we’re looking for a lower move. Our first profit-taking exit point for conservative traders is at $20. For aggressive traders, you can hold down to $16. For risk control, the conservative exit level is $25. $27 is the final exit point for aggressive traders.

SunEdison

 

Category: AOA Trade Summary