Deere Targeted For Low-Risk Options: Trade Before Earnings
Schaeffer's Investment Research | May 17, 2018 02:31PM ET
Deere & Company (NYSE:DE) is expected to report fiscal second-quarter earnings ahead of Friday's open. The stock has a history of positive earnings reactions -- closing higher in the session subsequent to the tractor maker's results in six of the past eight quarters. One options trader appears to be expecting on more of the same, but took a cautious approach to their bullish bet.
Specifically, it looks as if a long call spread was initiated last Friday on DE, with one trader buying the weekly 5/25 150-strike call and selling the 160-strike call for an initial net debit of $2.29 per spread, or $641,200 (2,800 contracts * premium paid * 100 shares per contract). The short call lowered the cost of entry of buying a call outright, while also dropping the breakeven mark to $152.29 (bought call + net debit).
However, the options trader has also forfeited the unlimited profit potential of a long call purchase. The maximum potential gain for this long call spread is limited to $7.71 per spread (difference between the two strikes less the net debit), no matter how far above $160 the stock may rise by expiration at next Friday's close.
At last check, DE stock was trading up 0.2% at $147.66. The shares have added 8.9% so far this month – thanks to a sharp bounce off their 320-day moving average – and appears to be forming an inverse "head and shoulders" pattern. Longer term, Deere shares are down 6% year-to-date.
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