Tomorrow morning (Wednesday December 12), Joy Global Inc, (JOY) reports Q4 earnings. Sales for the mining equipment manufacturer and servicer are typically tightly correlated with the demand expected in emerging and developed markets for natural resources including coal, copper, and iron ore. Through its subsidiaries and partners, the firm meets the machinery demands throughout the global mining industry.
The $6.1 billion firm, JOY, competes with companies including Caterpillar (CAT), a $51 billion conglomerate which sells mining equipment as part of its global operation. Caterpillar reported its most recent earnings in October and beat analyst expectations of $2.22 per share by reporting $2.54 per share. Both firms are watched closely by economists and analysts to determine the strength and weakness in marketplace demand for their products. Strong demand for the firms' mining products typically means, growing demand throughout the world for the raw materials their machines unearth.
Although many reporters continue to highlight slowdowns of economic growth in many emerging markets throughout the world, Joy is one of the firms that should be looked for as a true indicator of the global growth and demand. Even as countries like China continue to announce lower growth and projections, which may or may not be entirely realistic, one can see the true output by companies like Joy to see the actual global demand for the emerging market outputs. Subsequently traders and investors can allocate their trades around Joy based on their beliefs and analysis regarding the emerging markets as well.
The following bullish option trades will allow you to determine which strategy is best for you, by using low capital requirements. Looking to the option markets we can see Joy has high volatility in the front week options. Volatility sellers can rely on the volatility contraction for a gain. Joy's volatility for January and later expirations are around 43%, while December weekly expiration, expiring this Friday, has 76% volatility. The expected move through Friday is $3.65, with Joy at $58.25 here, will bring the stock price to $61.90 or $54.60.
Strategy #1: Long Call Spread
Buying a call spread is a bullish strategy with limited risk, as well as, limited maximum return. The potential maximum your position can be worth is the difference between the two strike prices used. The potential loss or risk is the amount you pay for the spread. With Joy around $58.25 here your strategy will be using the December weekly options Buy $57.5 and Sell the $60 call.
$57.5/$60 Long Call Spread
Cost: $1.20/contract Debit
Potential Maximum Value: $2.50/contract, over 108% return
Probability of Maximum Return: 33%
Potential Maximum Loss: Your cost, $1.20/contract
Break Even: $58.70
$60/$62.5 Long Call Spread
Cost: $.60/contract Debit
Potential Maximum Value: $2.50/contract, 240% return
Probability of Maximum Return: 15.5%
Potential Maximum Loss: Your cost, $.60/contract
Break Even: $60.60
Strategy #2: Short Put Spread
Selling a put spread is a bullish strategy with defined risk, in which you will be able to take advantage of Theta Decay, or the decrease in option value from time decay and shrinking days to expiration. As long as Joy remains above your designated short put, you will keep the entire credit. Again, with Joy at $58.25, your strategy will again be using the December weekly options by Selling the $52.5 and Buying the $50 put.
$50/$52.50 Short Put Spread
Potential Max Loss: $5.00-.15=$4.85/ contract
Probability of Maximum Return: 90%
Break Even: $52.35
$52.50/$55 Short Put Spread
Potential Max Loss: $5.00-.35=$4.65/ contract
Probability of Maximum Return: 74%
Break Even: $52.15