Two Option Trading Ideas for This Energy Services Stock

08/11/2010 12:01 am EST

Focus: OPTIONS

On August 9, analyst firm Wunderlich lowered its price target on Foster Wheeler Corp. (FWLT) to $31 from $34 and reiterated the construction and equipment name as a buy. The firm lowered its price target following a worse-than-expected earnings announcement from the company, but said it remains convinced the company is in a position to record improving results through 2011 and 2012.


Figure 1
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FWLT announced earnings of 48 cents per share on August 5 and missed estimates by three cents. On August 9, FWLT shares closed around $24 and change.

Two possible new trading ideas and their corresponding risk profile graphs follow. Investors looking for a pop up could consider buying calls due to expire in February. Investors who read the price target decrease as a bearish case could employ a neutral strategy called an iron condor.

The bull case for FWLT could bet on upside beyond the price target of $31, and investors could buy February 20 calls for $5.70 each (at the time of this writing). The cost for these long call trades is $570 in total. This strategy bets on unlimited upside, and the return on this trade is theoretically unlimited if the stock is trading higher than the breakeven level of $25.70. Maximum loss, on the other hand, is limited to the premium paid for the position, or $570, in this case.


Figure 2
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Investors looking to express neutrality on FWLT could consider an iron condor. Investors could sell the November 23-19 put spread for $1 and sell the November 26-30 call spread for $1. The credit on this position is $200, which also represents the maximum loss and maximum gain. Investors will break even on this trade if the stock is trading at $21 or $28, and the trade turns a profit if the stock drops below the upper breakeven or above the lower breakeven.

By the Staff at ONN.tv

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