McDermott International (NYSE: MDR) is an engineering and construction company that operates in three segments: Offshore Oil and Gas Construction, Government Operations, and Power Generation Systems.
MDR is scheduled to announce its Q1 2011 earnings on May 10. After its least two earnings reports MDR moved 9% and 7% respectively. This offers an opportunity for options trading investors.
MDR is gaining momentum, winning new contracts to add to its strong backlog. We have a positive outlook in the Energy sector and expect steady growth in all three of MDR�s segments.
However, the stock has pulled back nearly 10% within the last four weeks, closing April 7 at 25.73 and May 2 at 23.19.
MDR Option Trade � The May 21/24 Strangle
In this trade, the investor hopes for the stock to trade either well above the higher strike price or well below the lower strike price.
With MDR currently at $22.60, an investor could purchase the MDR May 24 Calls for $.40 and purchase the MDR May 21 Puts for $0.30 for a debit cost of $0.70.
The breakeven in MDR on the upside for this trade would be the higher strike � 24 � plus the total premium paid � $0.70 — or $24.70.
If MDR moves up, the profit potential on this trade is unlimited.
The break even on MDR on the downside is the lower strike � 21 � minus the total premium paid — $0.70 � or $20.30.
If MDR moves down, the profit potential on this trade is unlimited down to MDR trading at 0.
The maximum risk is the $0.70 premium paid for the strangle.
Stutland Equities is a premier futures and options trading company on the Chicago Board Options Exchange. Founded in 2005 and headquartered in Chicago, Stutland Equities specializes in volatility arbitrage across multiple asset classes.
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