Does Deere (NYSE:DE) Have Wind in its Sails?

Deere <span class= DE Option Strategies" src="http://oh-image.s3.amazonaws.com/September/100901Deere.jpg" border="0" alt="Deere DE Option Strategies" width="300" height="232" /> A couple of weeks ago, we took a look at Deere & Co. DE the day before its earnings report and outlined option strategies investors could use whether they expected positive or negative results. As it turned out, DE surprised to the upside (by 22 cents, no less) and still moved lower over the next few days. Some call this the “buy the rumor, sell the news” phenomenon.

If the bears had sold a December 67.50/72.50 call spread ahead of the report for $1.90, they’d be able to buy it back today for $1.50 (buying the 67.50 call and selling the 72.50 call), netting a small profit. The bulls, however, wouldn’t have been so fortunate, especially if they had opted for a short-term strategy.

Deere is an interesting stock and it seems to have settled down from its post-earnings volatility, so we thought it might be time to revisit it. The agriculture company was in the news Tuesday after agreeing to sell its wind energy unit to Exelon Corp. EXC for a cool $900 million. The sale is expected to close in the fourth quarter.

DE gained almost half a percent in Tuesday’s trading, outperforming the market. At the close, the shares were trading at $63.27, up 29 cents.

For investors looking to learn more about option strategies that could work in their portfolios, we’ve outlined two potential trades below in Deere: one bullish covered strangle and one bearish long put spread. These are not trading recommendations, merely examples of different options trading strategies for educational purposes. For a complete dissection of the strategies including profit/loss information…

Bullish Option Strategy: Covered Strangle

This strategy combines a long stock with a short strangle to create a position that will benefit from upside in the shares. The long stock, held through December expiration, has a dividend yield of almost 2% (remember that option traders do not collect dividends). Furthermore, selling the December 57.50 put/December 67.50 call strangle yields a credit of $6.15.

The maximum profit, should Deere be trading above $67.50 at expiration, is $10.38 per strategy. This is the credit collected for shorting the strangle ($6.15) plus the gains in the stock from $63.27 up to $67.50. Gains begin to deteriorate below the $67.50 strike until breakeven of $57.31. The breakeven price is calculated as follows:

Risk is significant but technically limited as Deere cannot theoretically trade below zero. Below the put strike (57.50), the position is long 200 deltas.

This is a rather complex trade. To see what could happen by changing entry prices, strikes, or months, I would encourage experimenting with the profit/loss calculator tool in a virtual trading account.

Bearish Option Strategy: Bear Put Spread

Those who remain on the bearish side of the fence where Deere is concerned might opt to go long the October 67.50/62.50 put spread by buying the 67.50 put and simultaneously selling the 62.50 put for a net debit of $2.86 per spread. The maximum an investor can lose in this example, if DE is above $67.50 when the options expire, is the $2.86 paid.

The maximum potential profit is $2.14, or the difference in strike prices less the premium paid. The investor reaches maximum profit potential at expiration if DE is below $62.50. Breakeven for this spread is $64.64, or the long put minus the premium paid. If DE is trading anywhere below this level when the options expire, the spread will be profitable.

Deere (DE) bear put spread