Cummins (CMI) shares slumped Tuesday after the company reported quarterly results. Technical analysis suggests the stock will bounce back, however, and savvy investors can profit from such a move using stock options.
Shares fell 4.3% to close at $122.29. Although the company reported adjusted earnings per share of $2.02, beating the Wall Street consensus for $1.93, revenue fell 9% year over year to $4.2 billion and missed analysts' expectations for $4.26 billion.
The chart shows that Tuesday's decline marked a gap below the established support line. That means the stock is likely to reverse higher and trade at more than $124 again.
An advantageous options trade would be to sell short a put option. This trade has the same market risk as a covered call. With the stock's price expected to rebound above $124, look at the Nov. 11 options, which expire in 10 days.
The 122 put option closed on Tuesday at a bid of 2.00. Subtracting trading costs, this trade would net $191. With only 10 days to expiration, expect rapid time decay. This is a 1.6% return in only a few days.
If the price ends up in the money (less than $122 per share), this short put can be closed or rolled forward to avoid exercise. As long as the stock's price remains at or above $122, the option will expire worthless in 10 days.