It is another beautiful Wednesday and I know that you’ll be most interested in knowing the contrarian trade I have for today. However, today’s trade is not a pure contrarian trade in the traditional sense of the word; yet, trading on the bullish side goes against everything the regular side of the market would suggest.
Enter; Harley-Davidson Inc. (NYSE:HOG), a company that needs no introduction as its history of making powerful motorcycles is enough introduction by itself. Harley-Davidson with its market capitalization of $12.70B is the parent company for the groups of companies doing business as Harley-Davidson Motor Company (HDMC) and Harley-Davidson Financial Services. The Company operates in the Motorcycles and Related Products segment and the Financial Services segment.
Shares of Harley-Davidson have had a very rough ride this year. The stock make a new 52-week high to $73.93 (a level not reached since 2006) in April and we were all happy, only for the stock to crash and drop down to the new 52-week low of $54.22 last Friday. As at last Friday, shares of Harley-Davidson dropped 10.98% in the YTD.
Why We Are Looking at HOG Options
However, shares of Harley-Davidson easily made the list of the top market performers in yesterday’s trading activity. The stock gained 6.50% to make an intraday high of $63.43 yesterday, the fact that the stock gained almost 7% in a single trading session after it has been consistently trading down for the last three months suggest that it might be time to pay attention to the stock.
Why Shares of Harley-Davidson Surged Yesterday
The gains recorded in shares of Harley-Davidson yesterday can be easily traced the better than expected third quarter (Q3 2014) results that the company released yesterday. The company reported third quarter profits of $150.1M or $0.69 per share to beat the consensus estimate of $0.60 per share. The company reported revenue of $1.3B to beat the consensus estimate of $1.1b. The company went ahead to reiterate its prior guidance as it expects to ship 270,000 to 275,000 motorcycles to dealers and distributors worldwide in 2014, an approximate 3-1/2 percent to 5-1/2 percent increase from 2013.
Quoting Harley-Davidson, Inc. Chairman, President and Chief Executive Officer Keith Wandell, “Harley-Davidson’s third-quarter financial results were in line with our expectations, and we are on track for a year of growth and strong financial performance in 2014.”
Technicals Support the Bullish Case
The chart above (with my annotations) shows how shares of Harley-Davidson have traded within the last one year. The stock had been on a bullish ascent in the first half of 2014 before the bears took control to send the stock crashing to new 52-week lows.
You can easily observe that the stock has two resistance levels $65 and $69, with the $69 leading the stock to new highs above $74. On the contrary, the stock had a $60 support, which was breached late last month, leading the stock to new 52-week lows.
How to Trade HOG Options
The stock has backtracked from the 52-week low and it is heading up towards the $65 resistance again. If the stock breaks out above $65 in the coming days, we can expect the ascent to continue to $69 and if the stock breaks out above $69, we can expect the ascent to continue to $74.
It is somewhat hard for the stock to drop below $54, considering the fact that it entered “oversold” territory about two weeks ago. However, the inability of the stock to breakout above $65 might see the stock consolidating some more in the mid $50s.
I am bullish on Harley-Davidson; hence, I am playing HOG options in line with the bullish scenario. I recommend buying the HOG Feb 2015 62.500 call (HOG150220C00062500) at $3.45 in expectation that the stock will breakout above $65.
— Daily Option Alerts