A few weeks ago (below) we placed a bearish trade in Deere (DE) with the thought that industrial stocks could play some serious catch up in the very near term with the intensifying sell off in oil given their exposure to the industry. Shares of DE have sold off 7% since its December highs, and down 4.5% since we entered the trade. While the short strike of our put spread clearly looks like support, we are inclined to take profits on the trade as a short term reversal in crude oil could cause a short squeeze in stocks that have sold off in sympathy. With that in mind we are going to take the profit and move on:
ACTION – DE ($85.25) Sold to close the Jan3oth 88/82 put spread at 2.45 for a $1 profit*
*Bid Ask in these options are very wide and makes sense to use limits inside the published quote.
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original post:
New Trade – $DE: Roadkill
Yesterday, I laid out the bearish case for Deere (below), concluding:
Because vol is pumped, timing on an out-of-the-money put spread like that is crucial and that’s why we’re not doing a trade right now. If we could catch the stock above $89 we’d feel pretty good about one of those two put spreads (cheaper than they are now) despite implied vol over 20. Stay tuned.
Well, the stock is higher, vol is lower, and oil is a disaster reversing all of its gains over the last two days, down 7.5% from this morning’s highs and approaching the lows. I am now going to place the trade detailed yesterday, but changing my mind on duration and strikes:
I am now looking to play for a short period:
Trade: DE ($89.37) Bought to Open Jan 30th weekly expiration 88 / 82 put spread for 1.45
-Bought Jan 30th weekly 88 put for 2.10
-Sold Jan 30th weekly 82 put at .65
Break-Even on Jan 30th Expiration:
Profits: between 86.55 and 82 make up to 4.55, max gain of 4.55 below 82
Losses: between 86.55 and 88 lose up to 1.45, max loss of 1.45 above 88
Rationale: The spread is about a quarter of the width of the spread with the break-even at levels where the stock was trading on this past Friday’s close. Targeting 82 on the downside seems reasonable as that was above the panic low in early Oct, but a level where the stock has some technical support. I am using the Jan 30th weekly expiration as we thought the Jan regular was too soon, and did not want to go all the way out to March (Feb won’t be listed until this coming Monday.) With Oil obviously unhinged we think industrials like DE will be some of the first stocks to test the Oct lows.
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Original Post Dec 17th, 2014: Name That Trade – $DE: Deere in Our Headlights
Since trading as high as $107 following China’s surprise rate cut on November 21st, shares of Caterpillar (CAT) have declined 17% to fresh 11 month lows, in clear correction territory down 20% from the 52 week highs:
CAT share volatility in 2014 has been a clear example of the push and pull between the earlier hope of growth in emerging markets to match some of the sparks in the U.S. vs the reality of recent signs of slowing in Europe, Russia, Brazil and China. This has all been made apparent buy the crash in oil prices.
Over the past week we have seen some very downbeat commentary from industrial companies Joy Global (JOY) and Navistar (NAV) with shares of both stock’s round-tripping all of their prior 2014 gains making new 52 week lows.
These stocks clearly reflect what is likely to be a challenging first half of 2015, especially if we continue to see the bifurcation between the strengthening U.S. and a weakening globe. The worst case scenario is that the U.S. does NOT de-couple from the global malaise and falls back into a sub 2% gdp (or worse) environment. If that happens 2015 turns into an all out deflationary disaster.
I don’t have a clue what happens from here but I will tell you that the likelihood of a dramatic rebound in EM in the first half of 2015 is NOT high and looking for stocks that don’t reflect a downbeat first half (yet) could present a trading opportunity.
One such company is Deere (DE) which gets about a third of their sales outside North America (vs CAT which gets about 60% of their sales outside North America) DE, like CAT buys back a ton of stock, which in this environment is all they can do to offset what has been a fairly dramatic earnings and sales decline over the last couple years (last Dec company announced an $8 billion buyback program).
DE trades at 10x trailing earnings and about 16x fiscal 2015 earnings that are expected to decline 36% year over year on a expected sales declines of 11%. On a P/E basis, DE is trading near its lowest levels since the end of the financial crisis reflecting a stagnant stock price and the dramatically decreased earnings. If earnings and sales were to somehow pick up, the stock would see a fairly quick move back to the all time highs of about $100 back in 2011. While a continued malaise could mean a re-test of key support at $80:
The stock is kind of in “No Mans Land.” It sits just about the middle of the range. But recently, options prices (30 day at the money implied vol) have seen a healthy uptick, nearly doubling off of the 52 week lows:
[caption id="attachment_49110" align="aligncenter" width="600"]
DE 1yr chart of 30 day at the money IV from Bloomberg[/caption]
The stock nearly traded 90 yesterday and we wish we had seen it then to take a shot from the short side. We’d love to get a chance a little higher and would likely look to a put spread in March. Right now with the stock at $88, the March 87.5/82.5 put spread is around $2. The March 87.5/80 is about 2.60.
Because vol is pumped, timing on an out-of-the-money put spread like that is crucial and that’s why we’re not doing a trade right now. If we could catch the stock above $89 we’d feel pretty good about one of those two put spreads (cheaper than they are now) despite implied vol over 20. Stay tuned.