How to harvest profits? Traders had some ideas yesterday.
First, find a story that’s been working, such as international stocks and materials. Second, look for a blue chip that’s pulled back to a potential level where chart watchers may look for a bounce. Third, think of a name that trades plenty of options that’s likely to have decent liquidity.
Deere (NYSE: DE) seemed to fit that bill on Thursday. First, the tractor maker gets more than half its revenue from places like Brazil and Europe.1 Second, it fell sharply last month but is now sitting near its 200-day moving average and an old peak from May. Third, it usually traded more than 15,000 contracts per session in the previous month—not huge like Apple (NASDAQ: AAPL)—but well above most names in the market.
Yesterday, DE’s activity spiked to almost twice that amount, led by the purchase of 8,500 December 115 calls for $5.65 to $6.30. Calls fix the price where an investor can buy a security, so they can make hay from a rally with limited capital at risk. Traders really love that when you’re talking about a big-dollar stock like DE.
Say the tractor maker climbs 8 percent to $125 by expiration: Those calls will roughly double. What if it motors to $130? Then they’re looking at a gain of more than 150 percent. Then if it really gets traction and plows all the way to $135, those calls will more than triple in value. Breakeven is around $121 and they’ll go worthless should the stock fall below $115.
Source: OptionsHouse by E*TRADE.
DE ended the session up 0.11 percent to $116.33. The industrial giant spent an entire decade trapped below $95 before ripping into triple digits last November. “Breakout!” “Turnaround!” cheered the bulls, glomming onto higher prices and beefier margins.2 They kept roaring with delight as global demand improved—especially in places like South America. By July, the shares had climbed all the way above $130. All it took was a less-than-perfect report for the bears to move in.
That’s what happened on August 18. Sure, earnings beat the Street, but revenue missed estimates and management sounded a bit cautious about domestic orders.3 Sellers hammered the shares and by the time the dust settled DE was down more than 5 percent, its biggest loss in over a year.
But then nothing else happened. The stock simply drifted in a range, occasionally probing below $115 but quickly rebounding to close above that level. Meanwhile, analysts touted signs of business stabilizing while other commodity-related stocks advanced. Management might have even planted a seed for the bulls this week by acquiring the maker of a company whose smart machines can recognize weeds and know when to spray herbicides.4 Robo-farming: What’s not to love?
Bottom line: DE has been holding its ground since a big drop last month and now the bulls are looking for a rebound.
1. Credit Suisse: More Bang for the Buck. 8/18/17.
2. Reuters: Deere shares leap after earnings beat on pricing, costs. 11/23/16.
3. Marketwatch: Deere sales fall short of expectations. 8/18/17.
4. Deere press release: Deere to Advance Machine Learning Capabilities in Acquisition of Blue River Technology. 9/6/17. Bank of America Merrill Lynch: European tractor trends positive in July. 8/23/17. Highlights from Farm Progress 2017. 8/31/17.