Trade Summary: May 5, 2014

May 5, 2014

 

Trade Rationale

There’s plenty being said about the shift into safer assets, which we’ve been seeing lately. Investors are exiting stocks with high earnings multiples (or no earnings) and heading for the greener pastures of equities stalwarts.

This can be seen in the performance of traditional safe-haven investments such as bonds and gold. It can also been seen clearly in stocks, with the tech-heavy Nasdaq performing a couple percentage points worse than the S&P 500 year-to-date.

Traditionally, investors looking for safer stocks are going to flock to those equities offering dividends. As more and more people buy dividend stocks, the price gets pushed up. That in turn lowers the dividend yield.

Savvy investors then, should look for stocks with high dividend yields. As investors search for yield, these are the ones that are positioned to move higher. Don’t just take my word for it, numerous studies link high dividend yield to strong future performance.

Fortunately there are plenty of good stocks out there with high dividend yields. We’re going to buy calls on two of them. We’re also going to buy puts on a stock with a low dividend yield, expecting the opposite performance.

First off, we’re going to buy calls in Transocean (RIG). RIG has a dividend yield over 5% and is also trading at a very attractive valuation. The stock is also below its 200-day moving average and looks to be headed in that direction.

Next, we’re purchasing calls on telecom giant Verizon (VZ). VZ is one of the safest stocks out there, and especially non-volatile. The company is offering a dividend yield of 4.5%. Plus, the shares are cheap at current levels from a valuation standpoint.

On the other hand, we’re going to take a bearish position on the Intercontinental Exchange (ICE), owner of the NYSE. ICE generates piles of cash, yet only has a dividend yield of 1.3%. The company also looks expensive at the current price. Finally, the recent backlash against High Frequency Trading could take its toll on exchanges, particularly large players such as this one.

So that’s three dividend-related trades and three trade opportunities. Keep reading for the details of each trade.

 

Trade Details

#1) Buy Transocean (RIG) August $43 Calls up to $2.20

We’re looking for RIG to move higher. Our first profit point for conservative traders is at $46. For aggressive traders, you can hold up to $50. Regarding risk control, the conservative exit level is $38. $35 is the final exit level for aggressive traders.

#2) Buy Verizon (VZ) August $47 Calls up to $1.25

With this trade, we’re also looking for VZ to move higher. Our first exit point for conservative traders is at $49. For aggressive traders, you can hold up to $52. For risk control, the conservative exit level is $45. And, $43 is the final downside exit level for aggressive traders.

#3) Buy Intercontinental Exchange (ICE) June $190 Puts up to $2.60

In this case, we want ICE to go lower. Our first profit-taking exit point for conservative traders is at $190. For aggressive traders, you can hold to $180. For risk control, the conservative exit level is $212. $220 is the final exit point for aggressive traders.

 

Category: AOA Trade Summary