Name That Trade – $JOY Hedges and Yield Enhancements for Longs

by Dan May 29, 2013 3:02 pm • Commentary

After reading my quick post from regarding JOY’s Q2 earnings tomorrow a friend, who is long the stock a tad higher, asked me for educational purposes what overlays I would add to a long stock position if she wanted to add yield to the position in an effort to get back to even on a greater than expected move higher, or  to protect the stock in the event of a greater than expected move lower.

Here are my quick thoughts:

The implied move for earnings is about 5.25% vs the 4 qtr avg move of about 4.5% and the 8qtr avg move of about 5%. $55 obviously a big technical support level dating back to last summer and there seems to be a bit of resistance at $60 or so, right above the 200 day moving average. I mention the technical set up and what the options market expects to help inform my strikes for the different overlays…

To reiterate, retail investors should use options for 3 main reasons:
1. yield enhancement
2. leverage
3. risk management

So this is how I would overlay JOY at $55.35 with the knowledge of my cost basis being a little higher:


1 –  Levered OverWrite (combining 1 and 2 from above)

Against long stock (JOY $55.35), Buy July 60/ 62.5 1×2 Call Spread for .20 credit

  • Buy 1 July 60 call for 1.30
  • Sell 2 July 62.50 calls at .75 each or 1.50 total

Break-Even on July Expiration:

  • Profits if stock btwn 55.25 and 62.50 on July expiration. If stock btwn 60.10 and 62.50 make up to 2.40, with max gain at 62.50… If stock is 62.50 or higher you have effectively sold the stock at 64.90 (have $7.25 gains in the stock and then 2.40 from the call spread up ~17.5%
  • Losses if stock below 55.00 (you received .25 credit for the structure)


2 – Risk Management – You want to hold onto stock but are worried about even more downside on an earnings event.

Against long stock (JOY $55.35), July 52.5/50 put spread vs. July 62.5 calls  for even

  • Buy 1 July 52.50 put for 1.90
  • Sell 1 July 50 Put at  at 1.15
  • Sell 1 July 62.6 Call at 75c

Break-Even on Friday’s Expiration:

  • Profits of stock up to 57.50, stock called away there
  • Losses of stock to 52.50, protected below


The first trade, the 1×2 is a great trade for someone that isn’t that worried about more downside but would love to supercharge their existing long a little bit to the upside over the next 2 months. This trade is actually short 10 deltas and would actually be down a little money on a sharp upside move on earnings. But that’s allright because the long stock holder will have made money on the underlying and has the potential for more money if the stock moves even higher or even stabilizes at a level higher than here as that 1×2 will collect premium each day until July expiration. Additionally it will actually make a little money on a small move down after earnings.

The second structure, the put spread vs call is for the person that is long stock and is really concerned about losing more on a down move on earnings. The structure protects them for part of any big down move and lessens the pain by owning the 52.5/50 put spread and financing it by selling the 62.5 calls and thereby giving up any upside above that level. But from here, and as a long from higher that’s a great tradeoff.



Original Post May 29th, 2013:   This Time Tomorrow – $JOY Q2 Earnings

JOY, the manufacturer of underground mining equipment is bucking the broad market weakness today (up ~1.4%) in front of their fiscal Q2 earnings report tomorrow morning before the open.    The options market is implying about a 5% move one way or the other following the results, which is a tad higher than the 4 qtr avg of about 4.5%.

JOY is not a name that we talk about much, but the commentary and forward guidance from management could be instructive to bearish trades that Enis and I currently have on in CAT (here) and CMI (here).  JOY gets almost 50% of their sales from outside the U.S. so any color on emerging market demand & headwinds of strong U.S. dollar could set the stage for how investors think about U.S. multinational stocks in the back half of the year.

The technical setup shows a stock that has been a major laggard ever since commodities topped about 2 years ago:

3 year daily chart of JOY, Courtesy of Bloomberg
3 year daily chart of JOY, Courtesy of Bloomberg

The 200 day ma in black is around 59, which could act as resistance on the upside.  The key long-term support level is around the 49-50 area, where the stock bounced last summer.  It’s only a 8 P/E name, but it’s not projected to grow earnings until 2015.  If earnings stabilize, the stock’s cheap, but if they continue to contract, it’s a value trap.