Monthly Cash Machine Newsletter, Sunday, 04/24/2005 05:38:36 PM ET
Alternate Portfolio Position: BHI "Bull-Put" Spread Projected Gain = $250
HAVING TROUBLE PRINTING?
BHI - Baker Hughes $46.00
Baker Hughes (NYSE:BHI) is engaged in the oilfield services industry. The company supplies wellbore-related products and technology services and systems to the oil and natural gas industry on a worldwide basis, including products and services for drilling, formation evaluation, completion and production of oil and natural gas wells. Baker Hughes conducts part or all of its operations through subsidiaries, affiliates, ventures, partnerships or alliances.
Here's a position for traders who want an alternative to the speculative position in Infospace. While this is also an earnings-related play, Baker Hughes has already confirmed they will report better-than-expected results due to upbeat industry conditions. Bear Stearns says the favorable factors include, "the highest level of oilfield activity since the early 1980s, a strong pricing environment for rigs and services in both the international and domestic arenas, and an improving sales mix due to an increase in average well depth and well complexity." While there is always the potential for an unfavorable (investor) response to the report, the outlook for the issue appears relatively stable based on its recent technical trend and the fundamentally "bullish" condition of the oil service sector. Traders should initiate a (minimum) 10-contract position to offset commission costs.
Fundamentals Chart Earnings Dates Analyst Ratings
PLAY (less conservative - bullish/credit spread):
BUY PUT MAY-40.00 BHI-QH OI=907 ASK=$0.20
SELL PUT MAY-42.50 BHI-QV OI=1551 BID=$0.40
INITIAL "NET-CREDIT" TARGET = $0.25-$0.30
POTENTIAL PROFIT (X 10 contracts @ $0.25) = $250
MARGIN REQUIREMENT (X 10 contracts) = $2250
RETURN ON INVESTMENT (max) = 11.1%
COST BASIS = $42.25
INITIAL EXIT STRATEGY:
Once the position is open, traders should consider placing a (contingent) order to close the short ($42.50) put options if the stock moves below $43.00. A "net-debit" order of $0.50-$0.60 to close the spread may also be appropriate for some portfolios. Future adjustments to the initial loss-limit/exit point will be posted (if necessary) in the MCM Newsletter.