Intermediate Trade: International Paper

The Trade: buy 100 shares of IP and buy 1 IP July $41 put for a total debit of 42.70 points. In 2004, the collective stock market mavens of the Wall Street Journal removed from their venerable but archaic index of industrials International Paper (IP), along with AT&T (T) and a stock that had to go, Eastman Kodak (KODK). In those stocks' stead, the WSJ added Verizon (VZ), Pfizer (PFE) and ah, well, AIG (AIG). Watching this selection process over what for me has been five decades leaves a lot to be desired, especially in the what-if mode of things. Like, how much higher would the DJI be today if they had just left things alone? I mean, could they have picked a worse stock than AIG as we headed into the last round of DJI abyss? Well, yes, a few other worse choices come to mind, but they were not industrials, they were brokerage firms. Oh, never mind. The stock market left the industrial era about the time we landed humans on the moon. Since then, things have moved ever so steadily into the technological era; the latest rather obvious proof to that fact is the growth of the tech related sector stocks (not in the DJI) such as: Facebook (FB), Google (GOOGL), Amazon (AMZN), Netflix (NFLX), Tesla (TSLA), and plenty of biotech giants such as Amgen (AMGN) and Biogen (BIIB) to name a few. How can a committee selection team miss all these companies' amazing growth boggles the mind. But for solace when attempting to understand how and why this continues to occur, consider what G.K. Chesterton said: I've searched all the parks in all the cities and found no statues of committees. For those of you who were wise enough to buy AT&T in the low to mid $20s in 2004, that selling caused for the most part because T was kicked out of the DJI, you know what I mean when I say that any stock removed from the DJI that makes zero-investor sense is always worth keeping your eye on and your wallet ready. This trade focuses on another one of the 2004 select group above, International Paper. IP has been a major international paper and packaging company since the late 1800s. Over the past 52 weeks, IP has traded between $33 and $53 (rounded). It trades at a trailing PE of 18 and a forward PE of 11. IP pays a quarterly dividend of $0.44/share, which equates to a current yield of around 4.4%. IP's balance sheet needs improvement, but IP's management is doing just that. One clue to a continuation of that improvement is found by doing a quick check of the short interest in IP. It's now less that 3% of the float. Most times, the shorts stay clear of a 4.4% dividend yield lest they want to pay it. And tomorrow IP will trade ex dividend. Technically, IP is also improving. Both the one-year stochastic and RSI have recently turned up, with plenty of upside potential remaining for both should this latest, shorter-term trend continue into the late spring and early summer months immediately ahead. The trade tactic I prefer now for IP is the synthetic call, which is a combination of long stock and a long/married put. The trade is as follows: -- Buy 100 shares of IP -- Buy 1 IP July $41 put for a total debit of 42.70. The total risk for the trade is 1.26 points, as the capture of this quarter's dividend reduces the total capital at risk by the dividend's $0.44/share. And of course the long $41 put is a guaranteed stop out at that $41 level. The suggested gain or loss targets are +$0.50/-$0.50 respectively, basis of that 1.26 points of total capital at risk.

Intermediate Trade: International Paper

I prefer a bullish synthetic call.

Columnist Conversation

A Recent Director Buy in Children's Place (PLCE)

A $525,000 Vote of Confidence on Macerich (MAC)

This Weekend on Real Money

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.