Archer-Daniels-Midland Co. (NYSE: ADM) is set to report their Q1 2008 earnings on Tuesday before the market opens. Analysts are expecting $0.51 EPS. For the past 2 years, ADM has beaten estimates 5 times, met once, and missed twice, but one of those misses was this period, Q1, in 2006. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on ADM due to inflated options prices ahead of earnings.After hitting a one-year high of $39.65 in April, the stock has fallen a bit but gained ground over the past month. ADM opened this morning at $35.00. So far today the stock has hit a low of $34.20 and a high of $35.14. As of 11:25, ADM is trading at $34.33, down $0.34 (-1.9%). The chart for ADM looks bullish and steady, while S&P gives the stock a 4 STARS (out of 5) buy rating.
For a bullish hedged play on this stock, I would consider a December bull-put credit spread below the $30 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. This particular trade will make a 4.2% return in just seven weeks as long as ADM is above $30 at December expiration. ADM would have to fall by more than 12% before we would start to lose money.
ADM hasn't been below $30 at all in the past year and has shown support around $34 recently. This trade could be risky if the company's earnings next week are awful, but even if that happens, this position could be protected by strong support it has found around $32 over the past five months.
Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: Mr. Archer (of no relation to the Archers of ADM) owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in ADM.
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