Joy Global (JOY) is a unique stock to invest in. It is much like a better-known company, Caterpillar (CAT). Each of these stocks has a high beta, which means the stocks need a healthy economic global environment to grow in. Beta measures the volatility of the stock compared to the broader market. It generally rises faster than the S&P 500 in a bull market and falls faster (than the average) in a down market.
With global uncertainty as we are now experiencing, these stocks are a hard sell as long-term investments. Why would Joy Global struggle like it does? One reason is China. China's economy is struggling and that has hit Joy Global hard. Rumors of a Chinese stimulus package have helped lift Joy Global over the past month, but the headlines have not been a catalyst for wary shareholders.
Another cautious sign, besides China's contracting, comes from BHP Billiton (BHP). It is the world's largest mining company (that may buy equipment from Joy Global and Caterpillar) and it recently delayed approval of $68 billion in projects because of the global slowdown. These are hard times for Joy Global. With a conservative dividend as well, it does not look like a stock that many investors may wish to flock to.
Click to enlarge image.
The stock looks as if it is in the beginning of an upward trend that has a nicely defined bullish peak-and-valley pattern. It seems as if July and August formed a base from which the stock is ready to move up. Next upper resistance is at $65, and it even looks as if the stock will use the 50-day MA as support. The RSI has been very supportive of the present trend and is following that trend. The MACD is also very bullish, supporting the present move. By all observations, the stock is bullish in nature.
The Options Play
Even though the stock looks bullish in nature, I believe the bullishness is due to anticipation of QE3 coming into play. I do not think it is a long-term move for the stock. With the election and fourth quarter expected to be bullish, I believe wrestling between a short-term bullish play or a longer-term bearish play is in order here. My struggle is following short-term rumors or long-term reality. Since the play is short term, I will follow the bullish pattern and create a bullish credit spread.
This is the Bull Put Spread:
- Sell a November 2012 put with a strike of "45" (priced at $0.55)
- Buy a November 2012 put with a strike of "40" (priced at $0.23)
- Net Credit to Start: ($0.22 or 4.4%)
- Maximum Profit: net credit
- Maximum Risk: $0.78
- Maximum Length of Trade: two months
As with all credit trades and straight option buys/sells, investors should have a good risk-management plan in place. Even though on paper a risk like this is $0.78, in reality an investor should have an exit plan long before a trade would be exercised.
Reasoning Behind the Trade
- In the short term, the markets are expected to be bullish.
- Short-term stimulus news from U.S., China, and Europe may keep the stock moving up in the short term.