Tag Team Options Trade: DOW
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Jill: The Dow Chemical Company
(DOW) manufactures and supplies chemical products used as raw materials in the manufacture of customer products and services worldwide. The Electronic and Functional Materials segment produces materials for mechanical planarization and materials for industrial applications. The Coatings and Infrastructure Solutions segment provides construction chemical solutions like insulation, house wrap, sealants, adhesive products and systems, as well as building and purification and separation technologies. The Agricultural Sciences segment offers crop protection and plant biotechnology products alongside urban pest management solutions. The Performance Materials segment produces materials for automotive systems, formulated systems, and oil and gas industrial applications. The Performance Plastics segment offers wire and cable insulation, semiconductive and jacketing compound solutions, and bio-based plasticizers. Lastly the Feedstocks and Energy segment provides raw material chemicals like ethylene and chlorine.
For those of you that follow my content, you know that the agricultural and fertilizer space is a key thesis for me in 2013 and one of my favorite areas to trade. (Here is more detail into my analysis from webinar with optionANIMAL back in March.) And, guess what? DOW and Monsanto (MON), one of my favorite names within the space, have entered into an agreement to create next generation of advanced weed and insect control technology in corn. Dow AgroSciences will license MON's Corn Rootworm III, a third-generation corn rootworm technology that controls the root-eating worms. On the other hand, Monsanto will license the use of Dow AgroSciences' new Enlist Weed Control System herbicide-tolerant trait in field corn. Monsanto will thus be the first licensee of the Enlist trait in corn.
It has has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago and has suffered a declining pattern of earnings per share over the past two years and I expect this trend to reverse over the coming year. Weak end-market conditions and lower pricing affected sales in the quarter. However, DOW's agricultural business was a bright spot, with sales increasing at a double-digit rate. It is benefiting from strong fundamentals in agriculture and food markets and is leveraging its North American feedstock advantage. Skip and I are going to take a longer-term position on DOW, primarily focused on the fundamentals. This is not a short-term trade and will require some patience as Q2 and Q3 for this sector are historically and seasonally volatile, but we love the set up and fits into our market thesis for 2013.
Skip: DOW is set to announce their 1st quarter earnings report before the opening of trading this Thursday (25th). The market expects flat results of 60c/share. Thus that is the number that is discounted in the stock's price.
Things earnings-wise begin to improve in this current quarter according to DOW analysts. The average expectation of the 20 analysts' projections found on Yahoo Finance is that DOW will show 70c/share performance in this quarter, a 27% improvement over 2012's 2nd quarter. For 2013 DOW should earn $2.34/share, a 23% gain over 2012's results. For fiscal year 2014 (ending in December) analysts think that DOW could earn $2.90, a 23%+ gain over 2013. The point being made here is that DOW has turned the earnings corner and is about to show excellent performance for many quarters to come.
DOW is a favorite of TheStreet.com as you will find by reading this quite recent report (see: http://www.thestreet.com/story/11900751/1/dow-chemical-co-dow-todays-featured-conglomerates-winner.html).
Technically, I now have DOW turning positive. The slow stochastic is turning bullish as is the RSI as I interpret each of these indicators. DOW could easily coil soon, a sign that the vols might be ready to move higher.
The options trade tactic I like for DOW is the bullish vertical call spread. The expiry is a rather long one, that of January 2014.
Trades: Buy to open 3 DOW January 2014 31 calls for $2.40 and sell to open 3 DOW January 2014 36 calls at $0.80.
The total risk for the spread is $1.60.
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