In the Bear CaveCramer said recently that he expects to see money rotating into large-cap industrial names and thinks these stocks might outperform small-cap and technology stocks over the next few months. On Tuesday, Prudential issued an upgrade on a host of industrial companies, including some that Jim named, such as Honeywell ( HON) and Dow Chemical ( DOW). Because most of these stocks have relatively low betas and sport correspondingly low implied volatilities, their options prices are fairly inexpensive. Using the leverage that options provide could offer a great opportunity to play catch-up for individuals or money managers who are underinvested or missed some of the current rally.
The table below compares the profit profile of the spread vs. being outright long either of these two strikes. While the upside may be limited, a 100% gain is realized under a much smaller move.
|Profit Profile for Dow Chemical Options |
September Calls/Spread with Dow's stock at various prices on Sept. 19 expiration
|DOW Stock Price||September 30 Call||September 35 Call||September 30/35 Spread|
|Source: TSC Research|
Why is using spreads more attractive than the outright purchase of calls? Well, spreads reduce your cost while allowing you to maintain a similar potential profit for a relatively small price move. This would allow bears to purchase several call spreads in various equities in order to gain broad upside exposure at minimal risk and dollar commitment.