I wrote an article in April about Honeywell International, Inc. (HON) on a position in the stock that I called "Short-term bearish and long-term bullish." Back then, I suggested a short-term income trade using options. Here is the trade I suggested:
The Options Trade
If we have identified the pattern as bearish short term, here is the play.
- Buy a June 2012 '57.5' put (priced at $1.41)
- Sell a June 2012 '55' put (priced at $0.76)
- Net Debit to Start: $0.65
- Maximum Profit: $1.85
It was a suggested trade that I did not make, but there were a couple times the trade could have been closed out with a nice profit. Looking at the chart, one can see that two dips (both in June) were the perfect points to make this happen. But it has been trading well below the 57.5 marker for awhile.
It looks like the stock may have just started to develop a bottom. Using the RSI, we see a positive divergence taking place in the stock that shows weakness in the downward move. This is understandable considering Honeywell's new production software and the long-term contracts it is putting together.
Honeywell's Oil Storage Terminal project in Nairobi
It recently acquired a $2.4 million project for a full automation solution for Petrocity's Greenfield Konza terminal storage facility in Kenya. The nation has an ever increasing demand for fuel this new facility on the Nairobi-Mombasa highway accounts for more than 50% of the country's oil consumption. So this is a major project for Honeywell. It's "Process Knowledge System" (PKS) will provide comprehensive solutions for the pipeline receipt system, tank farm, truck loading system, and terminal automation. Security, emergency shutdown and fire and gas systems will also be controlled.
"Honeywell services will offer 'end to end' integration to give us a global overview of the entire facility and ensure we meet best practice in safety. Once completed, it will be among the most technologically advanced storage terminals in Africa."
Long-term economic growth in Kenya requires greater demand for petroleum products and the center of that demand will be in Nairobi. And Honeywell will be at the heart of it all overseeing safe and efficient operations at the Konza storage facility.
Honeywell's Control Software
Honeywell has new industrial automation software that can help refineries, offshore oil and gas platforms, chemical plants and manufacturers reduce installation costs by up to 33 percent. Production can take place quicker, more efficiently and safely, and this is important as demands for energy continue to increase. It is not an easy task to undertake as the systems are complex, expensive and typically require many months of work to install and bring into full operation.
Honeywell's new Experion® Process Knowledge System (PKS) Orion, the latest version of the company's flagship process automation and control technology, significantly speeds up this process and reduces costs for the plant. For example, by installing Honeywell's new technology, a large refinery that produces up to 5,000 barrels of oil per day could begin production as much as a month ahead of schedule, which can save up to $50 million in production and capital costs.
With service and software like this, I am expecting Honeywell to find a bottom and turn around very soon. I cannot say how far it can move up, but I believe there is an opportunity for a short-term income play here.
The Options Play
The stock is presently trading at 55.59 and I expect it to move down again - possibly to about 53.5 before it moves up again.
- Buy a September 2012 put with a strike of '55.00' (priced at $2.34)
- Sell a September 2012 put with a strike of '52.50' (priced at $1.44)
- Net Debit to Start: $0.90
- Maximum Profit: $1.60
- Maximum Risk: net debit
- Maximum Time of Trade: 3 months