Mercer International Inc. (MERC) is a stock that I believe is primed and ready for for an upside move. "Sometimes you wanna start high," as the legendary Ted Nugent sang, which is the case with MERC as we are buying high to go higher. A Bull Call Spread is a good tool for gaining exposure to a stock position that an investor believes has upside potential. MERC is currently trading at $14.58 and has approached the 52-week high of $15.27 intra-day. For the chartist out there, MERC has a very nice 12 month chart with long basing periods and then breakouts. MERC has been on Sabrient’s top stocks for several weeks now due to the fundamentals.
Fourth quarter earnings grew 13-fold as pulp prices took off around the world. During 2010, pulp revenues were up 48% and emerging markets such as China, Russia and India giving a nice tail wind to future growth. Analysts have been raising estimates and price targets of MERC in recent weeks. Obviously one tool for gaining exposure to a stock you want to invest in is to simply purchase the shares for $14.58 but I prefer using the Bull Call Spread, allowing investors to gain the upside exposure for less capital invested. The Bull Call Spread is accomplished by selling the Nov $12.50 put (approx. $1.60/contract and buying the November $10 call (approximately $5.60/contract). Using this strategy the investor gains upside exposure to the number of shares (remember that each option contract is equal to 100 shares) for a net investment of $4 rather than buying the shares for $14.58.
Assuming $1,000 investment
Sell 3 MERC Nov $12.5 puts at the market, Thursday April 7, 2011 (MERC111119P00012500)
Buy 3 MERC Nov $10 calls at the market, Thursday April 7, 2011 (MERC111119C00010000)