Dykstra: Flex Some Muscle With Hercules

In a volatile market, moves upward happen almost as quickly as moves downward. As a result, it is increasingly important to lock in our profits when they happen. That is why we place a good-till-canceled (GTC) order for $1.00 more than our average purchase price for the options. Even if this volatile and bearish market were to continue, in the short term there will be days where the market rises and our deep-in-the-money calls get filled $1,000 above our purchase price.

The combination of downward protection provided by the deep-in-the money calls -- and our strategy for locking in profits by using GTC orders -- is effective in all market conditions. Volatility can be a scary word when it comes to the stock market, except for those of you who use deep-in-the-money calls.

The new pick today is Hercules Offshore (HERO), which provides shallow-water drilling and lift-boat services to the oil and gas exploration and production industry. The company primarily markets its services in the U.S., Gulf of Mexico, and internationally.

Hercules is buying Todco (THE) to expand its contract oil and gas drilling services in the U.S. and Gulf of Mexico shallow water and inland marine region, via its fleet of drilling rigs. Shares closed Tuesday at $25.45. The in-the-money calls we will use to control 1,000 shares will be the July $20 strike (HIQGD). We're buying 10 with a limit price of $6.10. The "premium" comes in at only 65 cents for us to control 1,000 shares of Hercules common stock all the way out until the third Friday of July.

Hercules is a buy and Todco is a strong buy, according to ValuEngine, so the combo should be a winner. Hercules shares dropped to $23.80 after its intention to acquire Todco was announced Monday, but it should rebound to $28, giving us the gain we need to snag a $1,000 profit.

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