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Deere in the Headlights

|Includes: Deere & Company (DE)

I was a buyer on the dip yesterday, watching the S&P for support at 1175.  I am nibbling at trades when the market bounces off support at that level.  I have had my eye on Deere for awhile, because I think Agriculture will be a solid long-term trend.  The chart below shows DE finding support at the 50-day MA:

 

DE 
 

 

I think this is a good place to get into a long-term trade with a good risk/reward picture.  I am not at the place to commit much in this market with the Euro crisis still in the news, so I decided to take a small nibble by writing a diagonal trade of DE.  Yesterday, while the stock was just over $75, I bought the January 2012 $80 call for $8.42, and sold the January 2011 $80 call for $1.34, for a $7.08 cost basis.  If Deere runs up to $80 by January, my profit is near $300 or about 40 percent.  But the real power of the trade is selling calls every month against the 2012 LEAP.  This is a great income trade while waiting for Deere long term.  I keep selling premium until Deere breaks above the short-term sold call or breaks down near a 20 percent loss.   By keeping these exits, my losses are capped at 20 percent, while my profit targets are at least 40 percent for the first sold call.   

Disclosure: Long DE