Considering Our Options – $JOY Formidable

by CC August 10, 2015 1:23 pm • Commentary

About 2 weeks ago we stepped in on Joy Global (JOY) with a defined risk contrarian call buy in October. Those calls were dollar cheap and we felt they didn’t properly reflect the room the stock had to run on the upside when (and if) a reversal in the chart came. We wanted to define risk because who knew where the exact bottom was, and even though vol was high it wasn’t high enough in our view based on how much the stock was moving. Here was the original trade and rationale:

Trade: JOY ($26.10) Buy Oct 26 call for $1.95

Break-Even on Oct Expiration:

Profits: profits unlimited above 27.95

Losses: up to 1.95 below 27.95 and total loss below 26

Rationale: This is a contrarian play in a stock with horrible price action and sentiment. Going out to October gives us some time, even if our entry is off slightly and even though vol is elevated options seem dollar cheap compared to how the stock is actually trading. If we do get a reversal soon we’d look to spread the calls or even close them is the snap back is big enough.

Today the stock is indicating it may have found at least a temporary bounce level, up over 8% on the day. Looking at the chart, if this reversal is able to hold, the stock has room to run:

Screen Shot 2015-08-10 at 1.07.52 PM
1 yr JOY from LiveVol Pro

Because the stock was in such a washout we’re going to try to be patient on spreading or closing. Right now the calls that we paid 1.95 for are worth about 2.35. Ideally the stock takes a run at 30, but if this bounce fails we’ll now try to use our entry premium as a stop and consider either spreading there defensively or closing altogether. We have a lot of time for this to play out so we want to be patient. JOY’s fortunes are tied to global commodities and we’ll be keeping an eye on the mining sector in general. For instance, the gold miner etf GDX is having a nice bounce today as well:

Screen Shot 2015-08-10 at 1.16.07 PM
1 yr GDX from LiveVol Pro

These stocks have gotten pummeled the past couple of years and a meaningful reversal may be difficult to spot. But the charts present an opportunity even on failed reversals because the implied volatility of these calls a few months out don’t seem to properly reflect the actual volatility of the stocks.