Buy the August, 2012 (HPQ) $14-$18 calls spread at $3.65 or best
- Opening Trade
- expiration date: August 17, 2012
- Portfolio weighting: 25% = 70 contracts
This is a bet that the Hewlett Packard shares (HPQ) will not trade under $17.65 by the August 17 expiration, or down $3.85 from here. That is 10% below the 2011 summer low, and down 19% from today’s price. If fact, Wednesday could have been the capitulation bottom for the entire move down that started in April, 2010. By my calculations, to get (HPQ) down that far, the S&P 500 (SPX) would have to fall below 1,150 by August, which I believe is unlikely.
I have known CEO Meg Whitman for a long time, since back in the days when she first started EBay. In fact, I was one of the company’s earliest customers and was nearly the first to buy a car off of EBay back in 1998. Up until then, the companies largest market had been for Beanie Babies.
She is far and away one of the best managers in the country, and is a great poster child for the Harvard Business School. Hewlett Packard clearly is one of the most daunting turnaround challenges of all time. Meg says that the company is only 10%-15% on the road to recovery.
(HPQ) has one good thing going for it. It is not competing with Apple on very many fronts. Apple is rapidly eating the lunch of practically everyone in the consumer electronics industry, especially at companies like Dell (DELL) and Research in Motion (RIMM).
(HPQ)’s core business is in printers and servers which Apple doesn’t build. Only a low end PC business is at risk. She is also addressing gaps in the company’s product lines which have been unnecessarily losing business to competitors, particularly in multifunction LaserJet printers. (HPQ) is introducing eight new models in the fall. Meg is already delivering the results. Her Q2 earnings on Thursday came in at 98 cents per share versus an expected 91 cents. The announced layoff of 27,000 is almost certain to deliver a quick shot in the arm for profitability. I will go more into the fundamentals for the company next week.
If this spread expires anywhere over $18, as I hope, your total profit should amount to (70 X 100 X $0.35) = $2,450. That gives you a profit on this less than three month play of 9.8%, or 2.45% for the notional $100,000 model portfolio. Professional options traders do this sort of trade all day long. This is the same as taking out $2.14 out of the stock on a non-leveraged basis.
If Greece forces us into major meltdown mode, we can always hedge this modest “RISK ON” trade through taking more aggressive “RISK OFF” positions, like selling short the (FXE), (SPX), (IWM), (GLD), or the (SLV) by buying puts.
Don’t place a market order for this trade or the floor traders will rip your eyes out. Don’t place individual orders for the legs either. Instead, place a limit day order in the middle market for the call spread only around $3.65, and wait for the market to come to you. It will find you.
Spreads can be wide on the deep out of the money $14 calls. If nothing happens then start raising your bid in 10 cent increments until something happens. There’s no rush to do this, but if you get filled today you can capture the extra sweetener of the time decay over the three day Memorial Day weekend.
These are the trades you should execute:
Sell short the August, 2012 (HPQ) $18 – calls at $4.05
Buy the August, 2012 (TLT) $14 calls at $7.70
Net Cost: $3.65
Value at Expiration ($18 – $14) $4.00
Go to it Meg
A Beanie Baby