Trading Strategies: Industrials Will Work Again; Take Your Positions Now

By Steve Smith The industrial names -- and for me that covers a wide range of sectors from energy, to miners to equipment manufactures -- have recently fallen out of favor. After being the market leaders for much of the first quarter, names such as copper producer Freeport-McMoran (FCX), integrated oil companies like ExxonMobile (XOM) and farming equipment maker Deere (DE), have see their share prices decline over the past two months on concerns of slowing global growth and the dramatic plunge is various commodity prices. But as we have seen, especially in the precious metal miners and energy producers, the equity names have not necessarily followed suit with the underlying commodities they're supposedly levered to. So as gold and silver skyrocketed in April, shares of major miners such as Newmont (NEM) or Pan American Silver (PAAS) struggled. Likewise as oil surged through the $100 level in March and April, the majors such as ExxonMobile or Conoco Phillips (COP) failed to make new highs and have now sold off precipitously as the underlying price of oil has retreated some 15% in the past two weeks. I believe that this recent underperformance, the result of short-term rotation out of the industrial/material sectors, represents a buying opportunity. The long term trend of emerging market growth, and all its demand for both hard and soft commodities, and the continued infrastructure build out remains in place.

(To see Todd Harrison's thoughts on scandals and the media, click here.)

Even at current price levels, oil at $100, copper near $4.00, gold around $1,400 and even the grains remain near 20 year highs these firms have plenty of room to profit. Now that some of the froth has been removed from the commodity sector I expect the stock prices for those companies should catch up to the positive fundamentals and profit potential impugned by current commodity prices. I'm looking at a way to use options to build a bullish basket of stocks by creating a position that has a lower cost and less risk but substantial upside potential compared to buying the underlying. A Big Fat Covered Position

(To see Toby Connor's article entitled, "Warnings Signs Caution the Next Crisis is Coming", click here.)

My Industrial Basket Made of Calls In creating my modified covered call/dispersion position I'm going to be using only options, that is, buying calls in the individual names rather than purchasing the underlying shares, to help reduce risk, and of course increase leverage. My basket of industrials will consist of five names and will be built by purchasing an equal dollar amount of calls that have at least 60 days remaining until expiration and are one strike out-of the money, and then selling an appropriate number of calls in related ETFs. So let's focus on spending $1,000 per stock (a total of $5,000) on these candidates:

(To see Lee Adler's piece on how the market will perform with less help from the government, click here.)

* Freeport-McMoran (FCX): Buy 3 August $49.50 calls at $3.30 a contract * Newmont Mining (NEM): Buy 4 September $55 calls at $2.60 a contract * Caterpillar (CAT): Buy 2 August $110 calls at $5.00 a contract * Eaton (ETN): Buy 5 July $52.50 calls for $2 a contract * Potash (POT) : Buy 4 September $55 for $2.50 a contract

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