Trade on DEERE

November 26, 2012

Before the bell was rang on the NYSE, Deere, the big agriculture manufacture,  reported their 4th Q earnings which disappointing analysts expectation.  Deere’s farm machinery rose by 16% in the quarter to $7.39 billion, as farm operating income rose by 7% to $931 million.

Deere’s construction and forestry equipment rose by 7% in sales to $1.65 billion, as there income from the business increased 38% to $120 million.

While listening to the conference call I have noticed two key things that are overlooked by rest of analysts.  Deere’s major advantage is Europe and Russia which are growing in demand faster than the company can grasp.  Their growth in that part of world is pushing Deere to search for partners to finance major equipment.  Therefore, besides the minor slippage in their earnings which were contributed by North America sales, Deere is looking strong in other parts of the world that are willing to fill in the revenue gap for 2013.

I was looking at Deere’s stock price noticing a severe gap down after the opening bell on Wed, Nov 21.  The stock hit low of $82.06 with a high of $86.23 day prior to the earnings release.  The major move down persuaded me to get in to a simple trade purchasing Dec 12 82.50 Calls.  Yes, Calls out-right with no spread.  The Calls on my part were bought at the wrong time.  My execution was too late since I purchased after a bump at $83.20 looking only to see the tape move down to low $82.21.  Since than the stock recovered to $83.78 and the trade is profitable, unfortunately my profits are cut short since my early execution.  I am waiting to close the trade as the stock nears $84.53.

Trade:    Dec 12 82.50 Calls

Why did I execute those calls specifically?  The near in-the-money calls were high Delta of  60, meaning they would react vigorously in the move of the stock price.  Since, I was expecting the gap to be filled within few days, those calls were the right choice for my trade.

One key note to take away from this trade is that when you are purchasing Options as your bet for a short term trade, choose only Options that are high Delta, roughly 60 or higher.

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