Deere is currently trading at $73.83 and is rated a buy with 4 stars by S&P. This is setting up nicely for a monthly income investment with a deep-in-the-money covered call.
Strategy: Look at the September 70 covered call. For each 100 shares of Deere (DE) stock you buy, sell one September 70 covered call option for a 68.13 (73.83 – 5.70) debit or better. That’s potentially a 2.75% assigned return on investment. This gives you almost 8% downside protection for the next option month. The technicals for DE are bearish with a weak downward trend. The stock is under accumulation with support at 66.06.
The long-term investor can look at the December 70 call trading at $8.30 at this time. This adds $2.60 more in premium compared to the September 70 call ($5.70). The December trade will net a 6% return on investment if assigned.
Research Notes: S&P maintains buy opinion on shares of Deere (DE). Jul-Q EPS of$1.69, vs. $1.44, is $0.09 below forecast, as 24% rise in equipment sales was partly offset by higher materials costs. Despite greater economic uncertainty, we see ongoing gains in demand for DE’s equipment. We also think its long-term trends are favorable, on growing needs for food, shelter and infrastructure. We keep our FY 11 (Oct.) EPS estimate at $6.40 and FY 12’s at $7.60. However, on reduced economic visibility, we cut our target price by $16 to $99.