3 Great Options Plays Off Tax Reform

Tax reform has passed and like all packages that come from Congress there are winners and there are losers. For the most part, this is a tax cut for many corporations; however, here, too, there are winners and losers. Giant multi-national corporations will see less of a benefit, as this bill will primarily aid domestic companies. While mid-cap and small-cap companies that can't lobby for tax breaks the way that S&P 500 companies are able to will get the most out of this bill, there are also some huge companies that could see wins. Here are three option trading ideas I like that are directly related to tax reform: AT&T Upon the tax bill passage, AT&T immediately announced two things: It will invest $1 billion in its own infrastructure; this will create jobs everywhere for the company's contractors and improve services for its customers. A $1,000 bonus to 200,000 employees, part of the tax windfall the company will benefit from. I don't think the above announcements are reasons to be crazy bullish on AT&T on their own. They are nice and great PR moves, but I would point out that this could also have been done for a very smart reason: a merger. Many believe that the Time Warner merger has been challenged by the Department of Justice, at least partially, for political reasons. There is no doubt that some Time Warner assets have been tough on the president. While the DOJ has denied the reasons for blocking of the merger are political, if AT&T was trying to grease the wheels a touch, the above steps would be a perfect way to do so. I am sure there will be concessions, but in the end I believe we will see the merger go through now, likely helped by AT&T assisting in proving the GOP's assertion that lower rates lead to much more money in the pockets of those who work hard. AT&T stock has been rocketing higher, and will likely keep going because the company is a huge beneficiary of the tax bill -- plus, now I think it will get the merger it longs for. Implied volatility (IV) is actually expensive in T right now, mostly because of the merger. I think that IV will drop over the next few weeks and the stock is likely to rally back above $40. I can sell the April 39 put, which is just in the money at about $2.45. In my view those will go out worthless as T will be $40-41 by then as investors see the light at the end of the tunnel on AT&T's merger with TWX. Papa John's Papa John's has had a rough go the last few months as its NFL sponsorship has been a bit of a debacle. However, as a restaurant name that is almost entirely domestic if the company can get past the NFL business, Papa John's will be in a great position to grow the business as it will save a ton on this tax reform. Having extra money from tax reform will help Papa John's increase its market share by opening more stores and franchises and assist in the digital pizza ordering infrastructure, an area in which it is trailing Domino's . With the stock sitting at a one-year low off of bad earnings, this could be one of the few deals in the restaurant business as one can buy PZZA on the cheap. Seriously, if Equifax can have a wicked rally off of what happened to them, Papa John's can catch a bid out of a bit of bad publicity. The stock is cheap and I think it will rally above $60 shortly. Looking at the price of options, they are not cheap. If the premiums come off, I could become a call buyer, but with options prices at these levels I am a put spread seller. I can sell the January 60-55 put spread and collect about $1.70. I believe I will get to keep all of this. If premiums then come off I might end up buying the February or April calls in PZZA at the 65-70 level as I think $75.00 a share is a decent target between now and June. Home Depot One of the things that is interesting, when looking at the tax bill, is how strange the current U.S. tax code is. If you are Home Depot HD, which employs hundreds of thousands of U.S. workers, no break for you. However, if you are Amazon , which can set up shop in any tax domicile it wants, by all means, pay nothing. To some extent, this tax bill changes that dynamic. Home Depot will see a reduced tax rate with the new bill. The company announced that with the bill's passage it will take the money and: Increase investment in its online business Improve stores Raise wages Buy back stock or issue a higher dividend The above cocktail of actions is a perfect recipe for a stock to rally. I have been saying for some time that two of the big beneficiaries of the rise in Amazon are True Value and Ace Hardware. The ability to order online will allow big purchases of hardware to simply be delivered. But what if I needed a hammer or a paint brush now? I would run to Ace or True Value in my suburb's downtown. With Home Depot now having a lot of extra money it will be in a position to: -- Have a much stronger online presence -- Hire workers with know how, which will help customers move in and out of the store more quickly with the product they need. HD is at an all-time high and has been almost parabolic in its move -- and rightfully so. This stock is likely going to run above $190 in the next few days and the next stop should be above $200. I think HD is set up as a shorter-term trade as there are fewer pieces to put together here. This is a stock that is going to drive Dow Jones Industrial Average higher in the first quarter and likely be one of the outperformers in Q1. I would be a buyer of the HD February 200 calls, which are dirt cheap at less than $1.00 a contract. I think by February expiration HD will be well above $200 and these calls will be huge winners. Thus, I like buying the HD 200 calls for about $0.90. Will there be losers in this tax deal? Yes, however, with the market primed to go higher in the Q1 traders will make far more riding the tax bill winners than betting on the losers, which could still run as the economy heats up. Every law has winners and losers, but betting on the winners, I believe, will pay.

3 Great Options Plays Off Tax Reform

Every law has winners and losers, but let's bet on the winners.

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