Bucyrus manufactures heavy machinery for the mining industry.  They were the darling of Wall Street until about September 2008, when they, along with most of the rest of the market, took a nosedive down to earth.  At last glance, their shares are trading at $17.24, well off their 52 week high of $79.50.


I like them as a fundamental long term recovery play, but in the short term, I would rather trade them in a well hedged environment.  Volatility is still very high, as shown in 1 year VIX chart below.  But the markets are up today, and volatility may be close to breaching below the 40 level.  As volatility (^VIX) goes down, the price of stock options for both calls and puts go down with it.

vix-drop

Before jumping into a short term trade, its good to know the earnings release dates of your chosen company, and their competitors.  Bucyrus is scheduled to release earnings on February 19th, just one day before the February options expiration.  CNH Global (symbol CNH) already released their earnings on January 21st.  Joy Global (symbol JOYG) released theirs on December 17th.

The Bucyrus play I like is the following:

  • Purchase shares of Bucyrus in 100 lot increments
  • Take advantage of still high volatility to sell covered calls today(SELL TO OPEN).  The March 17.50 covered call will bring in about $240  per contract, and the March 20 will bring in about $140 per contract.
  • To protect against February earnings, it may be useful to add a February protective put (BUY TO OPEN) on Bucryrus.  Buying a February 15 will cost about $80 per contract.  But as noted earlier, the market may continue heading up in the short term, and volatility may come down more.  If those conditions hold true, and as time premium continues to come down, it may be possible to get the February 15 Puts for only $40-60 per contract over the next week. Playing with the timing of the covered call and protective put separately turns the trade into a hybrid collar.

Analyzing the possible outcomes – Lets assume that an investor buys 100 shares of Bucryrus for $17.40, sells a March 20 covered call for $140, and buys a February 15 protective put for $85.  In this scenario the initial total cash outlay is $1740 – $140 + 85 = $1685.  If Bucyrus completely tanks after February earnings and goes to ZERO, then the February PUT would be worth $1500, and the net loss would be limited to only $185, not counting commissions, or dividends.

On the flipside, lets assume Bucyrus rockets higher after February earnings, and closes out March expiration above the 20 strike.  The shares would be called away for $2000, and subtracting the initial outlay of $1685, that would leave a profit of $315, not counting commissions or dividends.

And of course there are all sorts of scenarios in between, depending on the when and for how much covered calls and protective puts are entered and exited.

Disclosure: Currently long Bucyrus with a covered call hedge.  Intend to add protective put in the coming days.

Disclaimer: Trade at your own risk.  This is NOT advice.

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