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This Trade Decision Sets Up a Trading Opportunity

This Trade Decision Sets Up a Trading Opportunity

On Tuesday, President Donald Trump signed an executive order imposing steep import tariffs on washing machines and solar panels, saying the move showed the United States would not be taken advantage of anymore according to the White House.

The tariffs will vary and will be in place for the next three years. The level of the tariffs increase as the number of washing machines imported increases. Tariffs on individual machines could be as high as 50% or as low as 16%.


Source: The White House

The press release cited the long history of this problem which began in 2011 when Whirlpool Corporation (NYSE: WHR) filed its first complaint. In 2013, the US government found that Samsung and LG were unlawfully dumping South Korean and Mexican washers into the United States. The two companies responded by moving washer production to China.

In early 2017, the U.S. Government issued a new antidumping order against Samsung and LG for washers made in China.  But, even before the government established those penalties, the two companies stockpiled washers in the U.S. and immediately moved production to Vietnam and Thailand when the penalties took effect.

In May 2017, Whirlpool Corp. filed a safeguard petition with the U.S. International Trade Commission (ITC) to end this pattern of serial country-hopping to circumvent trade orders. In October 2017, the ITC voted unanimously that increased large-residential washer imports have been (or threaten to be) a substantial cause of serious injury to the U.S. washer industry.

In December 2017, the ITC provided its remedy recommendations to the president who signed the sanctions this week.

Impacts Will Be Almost Immediate

One impact of the tariffs will be higher prices for the appliances. Goldman Sachs is now forecasting “an 8 percent to 20 percent increase in the price of a new washing machine in the next year, depending on how much of the tax is passed on to U.S. consumers.”

This calculation assumes that tariff costs will be partly absorbed by international suppliers and/or offset by other operational or supply chain initiatives which would impact the flow through from tariffs to domestic pricing,” Goldman analyst Samuel Eisner wrote.

Meanwhile, Whirlpool Corporation Chairman Jeff M. Fettig praised the Trump Administration’s decision to uphold long-standing trade rules by establishing a tariff of up to the legal maximum of 50 percent on imports of large residential washing machines.

“This announcement caps nearly a decade of litigation and will result in new manufacturing jobs in Ohio, Kentucky, South Carolina and Tennessee,” Fettig said. “This is a victory for American workers and consumers alike. By enforcing our existing trade laws, President Trump has ensured American workers will compete on a level playing field with their foreign counterparts, enabled new manufacturing jobs here in America and will usher in a new era of innovation for consumers everywhere.”

Whirlpool added 200 new full-time positions at its manufacturing plant in Clyde, Ohio, in anticipation of increased demand following a safeguard remedy decision. The new hires are just the beginning of increased investments in innovation, manufacturing and additional manufacturing jobs for Whirlpool and its vendors.

It seems as if the decision will have an impact on the company’s earnings and traders bought on the news.

Trading the Trend

When a stock is expected to be the beneficiary of good news, traders could consider obtaining long exposure to the stock to profit. A number of options trading strategies could be used to meet this objective.

Among those strategies is a bull put spread that could be used. The risk and reward diagram is shown below and it offers limited risk with limited potential gains. However, it is well suited for a stock which is in an up trend.

Bull Put Spread

Source: The Options Industry Council

This strategy involves two put options. One put option is bought and a second put option with the same expiration date but with a lower exercise price is sold. Selling the put option will generate immediate income, just like the more familiar covered call strategy would. But, unlike a covered call, risk is limited.

Many traders will be familiar with the idea of a covered call. This is a conservative strategy many long term investors use to generate income in stocks they own that are unlikely to make large moves.

Although the bull put spread is different than a covered call, the bull put spread strategy meets the same objective as the covered call which is to generate some income. This trade generates immediate income and carries limited risk.

A Specific Trade for Whirlpool

For WHR, a bull put spread could be opened with the February 9 put options. This trade can be opened by selling the February 9 $150 put option for about $0.45 and buying the February 9 $148 put for about $0.30.

This trade would result in a credit of $0.15, or $15 per contract since each contract covers 100 shares. That amount is also the maximum potential gain of the trade.

The maximum possible risk is the difference between the exercise prices of the two options less the premium received. For this trade, the difference between exercise prices is $2.00 ($150 – $148). This is multiplied by 100 since each contract covers 100 shares.

Subtracting the premium from that difference means, in dollar terms, the total risk on the trade is then $185 ($200 – $15).

The potential gain is about 8.1% of the amount of capital risked. This trade will be open for about two weeks and the annualized rate of return provides a significant gain.

The bull put spread is an example of how options are a versatile tool and could meet many of your trading objectives. In this trade, options provide income and defined risk that could be lower than owning the stock. This strategy also has a high probability of success.

These are the type of trading strategies that are explained and used in TradingTips.com’s Options Insider service. To learn more about how options can be used to meet your goals, click here for details on Options Insider.