A Great Trade for a Flattish Market

A bevy of cross-currents are making it especially tough to predict the market's future direction right now, so any trade that can produce decent total returns regardless of what happens sounds attractive to me. A buy/write combination on C.H. Robinson Worldwide looks like it can fit the bill. For those unfamiliar with buy/write combinations, they involve purchasing a stock while simultaneously shorting covered calls and naked puts on it. CHRW, a third-party logistics provider, seems to lend itself to just such a trade right now. After all, the stock has gone up less over the past decade than its fundamentals suggest it should have. That's problematic if you've held CHRW for many years, but translates into a great potential opportunity for those who pick up the shares now. C.H. Robinson certainly sports a solid long-term record: The stock closed yesterday at $69.40 and was trading at $69.57 when I prepared these charts, giving CHRW a 2.47% dividend yield and an 18.8 price-to-earnings ratio relative to the current year's estimated earnings. Both metrics look favorable when compared to the C.H. Robinson's historical averages of 22.4x and 2.17%, respectively: A rebound to a 20x multiple would still be lower than the stock's historic norm, but would take CHRW to $74 a share vs. yesterday's $69.40 close. In fact, C.H. Robinson actually hit $76 or higher in each of the past three years, including the 2016 year-to-date period. The stock even peaked above $81 during 2010 and 2011 despite having earnings per share well below current levels. As an added bonus, analysts expect the company's EPS, revenues, cash flow and dividends to all set new record highs in 2017. Standard & Poor's rates C.H. Robinson as a four-star buy (out of a possible five stars), with an $85 12-month price target: Here are the nuts and bolts of a buy/write transaction on the stock, based on real-world quotes as of yesterday morning: When executed in a margin-type account, you can use the cash you'll receive for your puts and calls to help pay for the shares that you'll purchase. And CHRW only has to hit $70 or higher (60 cents above yesterday's close) by the time the options expire on Jan. 19, 2018, for the trade's best-case scenario to kick in. Even a 1% gain from yesterday's levels would more than accomplish that: In fact, there are only two ways that this trade can go, and both seem fairly positive for investors. If CHRW closes at $70 or better on Jan. 19, 2018, then: The $70 call will be exercised. You'll sell your shares for $7,000. The $70 put will expire worthless (good news for you as a put seller). You'll likely have collected at least $258 in dividends. Your final position will be no CHRW shares and $7,258 in cash. Under this scenario, you'll walk away with $1,681 in net profits -- $7,258 of proceeds minus your $5,577 original outlay. Your cash-on-cash return will thus equal 30.1% for 17 months, or about a 21% annualized return on any upward move of 60 cents or better. That sounds good to me. Conversely, if CHRW closes below $70 on Jan. 19, 2018, then: The $70 call will expire worthless. The $70 put will be exercised. You'll be forced to buy another 100 C.H. Robinson shares at $70 apiece, laying out an additional $7,000 in cash. You'll likely have collected at least $258 in dividends. Your final position on this trade will be 200 CHRW shares. But even under this scenario, your 200-share position will have cost you $12,319 -- your $5,577 initial investment plus $7,000 more and minus $258 in dividends. That will give you a $61.60 average cost basis on your 200 CHRW shares. That's not bad for a company that currently trades at nearly $70. In fact, C.H. Robinson would have to drop some $8 from current levels before you'd lose any money -- an 11.4% safety margin. The Bottom Line We can never know for sure how future stock-price action will go, but the chart above shows that CHRW has spent more than 98% of the past two years in what would be profitable territory for the trade above. I'm currently short on CHRW January 2018 puts, and I might leg into the other two parts of this trade very soon.

A Great Trade for a Flattish Market

A 'buy/write' combination on C.H. Robinson looks promising.

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